Rebalancing Band- Wider or Tighter for Volatile assets

CFA Level III Portfolio Management
#1

I am seeing conflicting information on this based on some of the readings

What’s the correct answer?

#2

Narrower.

Note that they mean volatility of prices, not volatility of returns.

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#3

ok I do agree with you and that’s what I understood too, but if you check the reading related to Case Study Institutional, question 1 asks which asset class needs their rebalancing band to be revisited.

They said cash and private equity
Cash because it has the wider rebalancing band and lowest standard deviation, so the rebalancing band needs to be reduced while for private equity, they say it has the highest standard deviation and smallest rebalancing band, so the band needs to be expanded
I just don’t understand where we are going with this

#4

At the bottom of p. 335 the curriculum says that more volatile asset classes should have wider bands. This is at odds with earlier versions of the curriculum (see, for example, the 2018 Level III CFA exam, question 10-A).

So . . . my answer agrees with the old curriculum, but not with the current curriculum.

Sigh.

Note that it appears that in the curriculum the objective is to minimize rebalancing costs. That’s certainly not the only consideration (and arguably not even the most important one), but that appears to be their focus now, even without mentioning it explicitly in the question.

#5

so whats the way to approach this type of question in the actual exam

#6

I did some questions in the cfa institute website and they took your approach, but then in this particular reading, the focus is on something else

#7

I’d say that you have to go with what’s in the current curriculum: more volatile means wider bands.

That’s what I’d do. But I wouldn’t like it.

Edit: in volume 1, reading 6 (Principles of Asset Allocation), §20, Exhibit 48, p. 370 it says that more volatile asset classes deserve narrower corridor widths, consistent with your thoughts and my original answer. I’ll send an e-mail to CFA Institute about the inconsistency.

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#8

yes exactly - that’s what I thought because now based what they say in reading 28, I can’t even find the logic in it

I will keep you posted on what they say