Rebecca Riley and Daniel Gray are portfolio managers for Silver Wolf Asset Management. The firm believes that rebalancing a portfolio is important for maintaining an investors exposure to systematic risk factors and follows a percentage-of-portfolio approach to rebalancing. Riley and Gray each recently brought a new client to the firm and are starting to establish guidelines for investing their portfolios. Riley states, My client has a low tolerance for risk, so I am setting wide tolerance corridors for rebalancing. If the market takes a downturn, the client will not want his fixed income assets sold to purchase more equities. Discussing his client, Gray says, My clients portfolio consists largely of small-cap domestic equities, emerging market equities, and high yield bonds. Since the asset classes in his portfolio are relatively volatile, I am also setting wide tolerance corridors, or else I would be rebalancing his portfolio practically all the time.
With regard to their statements about the effects of factors on the width of the tolerance corridors: A) | Rileys statement is incorrect; Grays statement is incorrect. |
| | B) | Rileys statement is correct; Grays statement is correct. |
| | C) | Rileys statement is incorrect; Grays statement is correct. |
| | D) | Rileys statement is correct; Grays statement is incorrect. |
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Answer and Explanation
Both Rileys statement and Grays statement are incorrect. Based on the criteria they have stated they should be setting tight tolerance corridors for rebalancing purposes. Riley said that her client has a low risk tolerance. With a low risk tolerance, tolerance corridors should be smaller in order to detect corridor violations and take action to avoid an even worse violation. If the portfolio is allowed to drift, riskier assets in the portfolio will tend to take over. With volatile asset classes, Grays client should also have small tolerance corridors. When an asset class is volatile and/or the rest of the assets are volatile, the tolerance corridor should be small to give the portfolio manager the ability to detect any violation in the allocation and react quickly to avoid an even worse violation. | 
发表于 2008-9-18 16:14
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