Hello dears,
in reading 12: Overview of Asset allocation p. 52 in CFAI Book … under strategic consideration in rebalancing it written that all else being equal: “less correlated” assets also have tighter rebalancing ranges.
is it correct? or am i missing something here. coz i think, since they are less correlated, that means lower risk and accordingly the range might be wider.
anybody have an answer for me?
I found the answer:
an asset the is more highly correlated with the rest of the portfolio than another would merit a wider rebalancing range, all else equal, because it would be closer to being substitute for the balance of the portfolio; thus, larger deviations would have less impact on portfolio risk.
The first thing you need to know is that they’re talking about correlations of prices, not correlations of returns. They don’t tell you that.
If prices have strong, positive correlations, then percentage allocations don’t tend to change much, so you might as well have wide rebalancing ranges.
If prices don’t have strong, positive correlations, then percentage allocations will change more frequently. In that case, you likely want narrower rebalancing ranges so that you don’t let the allocations run away from you.
now it makes more sense. thank you
You’re welcome.