Reading 32 Monitoring and Rebalancing FinQuiz.com FinQuiz.com CFA Level III Item-set - Solution Study Session 16 June 2018 Copyright © 2010-2018 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com FinQuiz.com © 2018 - All rights reserved Reading 32 Monitoring and Rebalancing FinQuiz.com FinQuiz Level III 2018 – Item-sets Solution Reading 32: Monitoring and Rebalancing Question ID: 14097 Correct Answer: A The calendar rebalancing method is a rebalancing technique which rebalances client portfolios to target weights based upon an agreed upon schedule Calendar dates trigger portfolio rebalancing Percentage-of-portfolio rebalancing involves setting rebalancing thresholds or trigger points as a percentage of the portfolio’s value Both methods are disciplined rebalancing approaches However ad-hoc approaches, as described by the senior portfolio manager rebalance portfolios without being based on any sound criteria, lack discipline His comments referring to the former two methods being disciplined approaches are correct Additionally, the two former approaches systemize the rebalancing process and rebalance portfolios by adopting rebalancing rules Question ID: 14098 Correct Answer: C Benefit 1: The calendar method may ensure that the actual portfolio weights not divert far from the target weights for long periods of time provided that the rebalancing frequency is adequate given the portfolio volatility However the first benefit outlined by the senior portfolio manager is not entirely accurate as the benefit is conditional upon the adequacy of rebalancing frequency to portfolio volatility, which the senior manager fails to address Benefit 2: The advantage of the percentage-of-portfolio rebalancing is that it can exercise a tighter level of control on the divergence from target proportions (particularly at lower rebalancing frequencies such as semi-annually or annually) However the rebalancing method in question requires greater monitoring, possibly daily, generating a higher level of monitoring costs Thus this benefit has not been correctly addressed Benefit 3: The calendar method is the simplest rebalancing approach and does not involve continuously monitoring the portfolio within the rebalancing period unlike the percentage-of-portfolio rebalancing method Should client circumstances or market conditions remain relatively stable, portfolio rebalancing will be required infrequently and thus will generate a low level of monitoring costs This benefit has been correctly addressed by the senior portfolio manager FinQuiz.com © 2018 - All rights reserved Reading 32 Monitoring and Rebalancing FinQuiz.com Question ID: 14099 Correct Answer: A The higher the risk tolerance, the wider the optimal corridor Based on McCoy’s high risk aversion, a low corridor width is optimal as he will be more sensitive to portfolio divergences from the target Question ID: 14100 Correct Answer: B The higher the correlation of assets with the rest of the portfolio, the wider the corridor width This is because when assets move in synch, less divergence from the target is likely The lower correlation between international securities with McCoy’s portfolio implies that significant divergence from target portfolio weights is likely Thus a lower corridor width is required The more expensive it is to trade an asset (or the lower its liquidity) the wider the corridor should be The inclusion of illiquid assets to McCoy’s portfolio dictates a wider corridor width The level of diversification benefits gained is not a factor which directly affects the optimal corridor width Question ID: 14101 Correct Answer: C Based on the strategic asset allocation for international equities, the upper-bound is 28.5% (25% + 3.5%) and the lower bound is 21.5% (25% − 3.5%) Should the market rise and increase the weight of international equities in Richards’ portfolio to 27%, no rebalancing action is required as the actual portfolio weight lies below the upper bound of the strategic asset allocation 27% < 28.5%) Question ID: 14102 Correct Answer: C The strategy proposed by Richards is a CPPI strategy as the strategy involves purchasing equity securities when the market rises and sells equities when the market falls However the strategy will produce the worst possible results under the present market scenario relative to the other two strategies FinQuiz.com © 2018 - All rights reserved .. .Reading 32 Monitoring and Rebalancing FinQuiz. com FinQuiz Level III 2018 – Item- sets Solution Reading 32 : Monitoring and Rebalancing Question ID: 14097... a low level of monitoring costs This benefit has been correctly addressed by the senior portfolio manager FinQuiz. com © 2018 - All rights reserved Reading 32 Monitoring and Rebalancing FinQuiz. com... is to trade an asset (or the lower its liquidity) the wider the corridor should be The inclusion of illiquid assets to McCoy’s portfolio dictates a wider corridor width The level of diversification