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LOS e: Contrast calendar rebalancing to percentage-of-portfolio rebalancing. ffice ffice" />
Q1. Tyrone Wilkins and Deborah Ortiz are portfolio managers for Meabon Asset Management. Both Wilkins and Ortiz believe that rebalancing is an important part of portfolio management, but are unsure which rebalancing method would be best for their respective clients. Wilkins wants to maintain his client’s exposure to systematic risk factors, but does not want to spend his time constantly monitoring his client’s portfolio. Ortiz is most concerned that two or more asset classes in the portfolio could stray too far from the portfolio’s target allocation. Given their concerns, which rebalancing method would be best for Wilkins and Ortiz respectively?
Rebalancing Method Rebalancing Method
for Wilkins for Ortiz
A) Percentage-of-Portfolio ffice:smarttags" />Monte Carlo Portfolio
B) Calendar Percentage-of-Portfolio
C) Percentage-of-Portfolio Calendar
Correct answer is B)
The two primary methods of rebalancing are calendar rebalancing and percentage-of-portfolio rebalancing – Monte Carlo is not a rebalancing method. With calendar rebalancing, the portfolio is rebalancing on a predetermined date. Since calendar rebalancing provides discipline without the need for constant monitoring, calendar rebalancing would be appropriate for Wilkins. Percentage-of-portfolio rebalancing is triggered by changes in value rather than calendar dates. Since Ortiz is most concerned about asset classes straying from a target allocation, Ortiz could use percentage of portfolio rebalancing to set a target corridor for each asset class and rebalance the portfolio when the portfolio’s asset allocation moves outside of the corridor.
Q2. Michael Severino and Jeffery Chalmers are portfolio managers for Parthenon Asset Advisors. Severino and Chalmers both believe that having defined criteria for rebalancing a portfolio provides discipline in their portfolio management process, but they have different opinions on how to go about it. Severino states, “With calendar rebalancing, a portfolio could spend the majority of its existence looking extremely different from the target asset allocation, but trades made to rebalance the portfolio may only have a minor impact on how the portfolio is allocated.” Chalmers replies, “If we use percentage-of-portfolio rebalancing, there may never be a trade placed to rebalance our client portfolios.”
With regard to their statements about rebalancing methods:
A) Severino is incorrect; Chalmers is correct.
B) Severino is incorrect; Chalmers is incorrect.
C) Severino is correct; Chalmers is correct.
Correct answer is C)
Both Severino and Chalmers make correct statements. With calendar rebalancing, the rebalancing process is related to the passage of time rather than the value of the portfolio. In theory, a portfolio that is rebalanced using the calendar rebalancing method could stray considerably from the target asset allocation before the rebalancing date, but move closer to target on the rebalancing date, resulting in minor trades in the portfolio. In the case of percentage-of-portfolio rebalancing, a tolerance band is set for each asset class in the portfolio, and the portfolio is rebalanced when it moves outside of the tolerance band. Under the percentage-of-portfolio method, if the asset classes never stray outside of the tolerance levels, the portfolio will never have to be rebalanced.
Q3. Jennifer Engle, CFA, Chairman of Engle Capital Management wants to implement a defined rebalancing process for all of the portfolios managed by her firm. Engle is aware that calendar rebalancing or percentage-of-portfolio rebalancing are the two primary methods of rebalancing a portfolio. Engle asks Michael Buening, an analyst, to prepare a report on the best rebalancing method for specific criteria. Specifically, Engle wants to know which method would be best under three different criteria: (1) time spent on the rebalancing process, (2) expense of trading, and (3) consistency of portfolio asset allocation. Which of the following correctly lists the best rebalancing method for each of Engle’s criteria?
Time Spent on Process Expense of Trading Consistency of Allocation
A) Calendar rebalancing Percentage-of-portfolio Calendar rebalancing
B) Calendar rebalancing Unknown Percentage-of-portfolio
C) Unknown Calendar rebalancing Percentage-of-portfolio
Correct answer is B)
The primary benefit to calendar rebalancing is that it provides the discipline of rebalancing without the constant need to monitor the portfolio. The result is that calendar rebalancing is the less time intensive rebalancing method.
Trading expense related to rebalancing is a result of where asset thresholds are set under the percentage-of-portfolio method, and also the volatility of the portfolio. For a portfolio with low volatility and wide thresholds, calendar rebalancing would result in more frequent trading, while a volatile portfolio with tight thresholds would lead to more frequent trades under the percentage-of-portfolio method. Therefore, the best method if trading expenses were the primary criteria is unknown.
The primary benefit of percentage-of-portfolio rebalancing is that it minimizes the degree to which asset classes can violate their allocation corridors, resulting in the most consistent asset allocation. With calendar rebalancing, the portfolio allocation could vary widely in between rebalancing dates.
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发表于 2009-4-10 12:56
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