Reading 46: Monitoring and Rebalancing Los g~Q1-3

best, following, difference, statements, versus

LOS g: Compare and contrast the benefits of rebalancing an asset class to its target portfolio weight versus rebalancing the asset class to stay within its allowed range.

Q1. Which of the following statements best characterizes the difference between rebalancing to consistently maintain an asset class’s target portfolio weight versus rebalancing to within an allowed range? Rebalancing to consistently maintain an asset class’s target portfolio weight:

A) will always have lower tracking error.

B) will result in higher trading costs.

C) require more monitoring of the portfolio than rebalancing within an allowed range.

Q2. Which of the following client portfolios is most likely to generate the highest trading costs?

Portfolio	Allocation	Rebalancing Discipline Employed
A	40% Corporate Bonds; 30% Mortgage-Backed Bonds; 30% Government Bonds	Rebalanced on the last day of each calendar quarter.
B	25% Domestic Equity; 25% Real Estate; 25% International Equity; 25% Corporate Bonds	Rebalanced within an allowable range of 5% for each asset class.
C	40% Domestic Equity; 30% International Equity; 30% Government Bonds	Rebalanced to precise target weights if allocation strays from target.

A) Portfolio A.

B) Portfolio C.

C) Portfolio B.

Q3. Anita Malley and James Upshaw are portfolio managers for Washington Square Asset Management. Malley and Upshaw are debating the merits of rebalancing an asset within a portfolio to its target portfolio weight versus creating a tolerance band for each asset. Malley states, “Rebalancing a portfolio so that target weights are maintained may force the manager to provide liquidity to the market, resulting in poorly timed trades and higher trading costs.” Upshaw states, “It does not matter if we rebalance to maintain target portfolio weights or create tolerance bands; if we use either method, the portfolio will require constant monitoring.”
With regard to their statements:

A) Malley is correct; Upshaw is incorrect.

B) Malley is incorrect; Upshaw is correct.

C) Malley is correct; Upshaw is correct.