Can someone explain this to me? To me, the higer the correlation among asset classes, the less you would need to fiddle with the corridor since everything will move together. When one asset return increases, so will the others so it’s less likely you will deviate from your target allocations.
So why would this cause you to want to increase your corridor range? If anything, I would think it has no impact…?
Higher correl means assets move together . One goes up otber goes up so no need to rebalance
Right, everything pretty much stays close to original targets, why does that mean increased corridor? Again I would think it has NO impact on the corridor widths…
Edit
Nevermind, I found an easy way to remember this. I don’t think specifically in terms of corridor width, rather rebalancing more or less frequently.
Highter trans costs, higher risk appetite, higher correl among assets means you can afford or should rebalance less. Less rebalancing = wider corridor.
Higher vol of asset returns means more likely you’ll deviate from target allocations, so you need to rebalance more often, sooner than later. More rebalancing = tighter corridor.
Just remember volatility does the opposite of everything else. Your good.
I guess their logic is: if correlations are high asset weights will naturally tend to revert to their original values. If you rebalance too soon you will incur in unnecessary costs.
OKey, i get this point by memorizing, but not the logic behind it.
Is you have a 50%/50% stock/bond porfolio, if correlation is 1, if stock increase, bonds will do the same, so, the 50-50% wont be affected. Why you will need to have a wider corridor? i dont get it.
Thanks in advance.
If assets move together then your overall risk profile should stay consistent - less need to incur costs to rebalance. Think of risk of deviating from SAA and unintended risk exposure.