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Reading 32 Monitoring and Rebalancing FinQuiz.com FinQuiz.com CFA Level III Item-set - Question 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 Item-set ID: 14096 Questions 1(14097) through 6(14103) relate to Reading 32 Cremitia Associates Case Scenario Cremitia Associates is an asset management firm providing portfolio management services to individual and institutional clients When managing client portfolios, the firm follows a variety of rebalancing schedules varying according to the type of client portfolio in question Two common methods used by the firm are the calendar rebalancing and percentage of portfolio rebalancing methods The firm’s senior portfolio manager cites the advantage of using these rebalancing methods relative to an ad-hoc rebalancing method by making the following statement: “The benefit of using rebalancing methods is that they tend to systemize the rebalancing procedure by instituting well-defined rules which identify the frequency with which rebalancing may be conducted, in case of the calendar method, and the trigger points which mandate portfolio rebalancing, in case of the percentage-of-portfolio rebalancing method In contrast, an ad-hoc rebalancing approach designed to rebalance a portfolio upon the portfolio manager’s desire and convenience lacks the discipline most often associated with two former rebalancing methods.” When asked by one of his clients the benefits of using each of the two rebalancing methods, the senior portfolio manager shares the following three benefits Benefit 1: The benefit of using the calendar method is that the method ensures that the actual portfolio does not diverge from the target portfolio over long periods of time Benefit 2: Relative to the calendar method, the benefit of using percentage-of-portfolio rebalancing is that it exhibits tighter control over the divergence of actual portfolio weights relative to target weights and requires a lower level of monitoring frequency Benefit 3: Relative to the percentage-of-portfolio rebalancing, the calendar method is a simple approach to rebalancing and generates a lower level of monitoring costs on the portfolios of those clients with relatively stable circumstances and clients located in relatively stable equity markets Colin McCoy is a client of Cremitia Associates Due to his high risk-aversion, his portfolio has been allocated to relatively safer securities with lower volatility levels McCoy’s portfolio manager allocates international equity securities provided these equity securities have a low correlation with his existing portfolio McCoy has complained that his portfolio manager is not doing enough as his manager has recently allocated illiquid securities which are inappropriate given his need for significant liquidity FinQuiz.com © 2018 - All rights reserved Reading 32 Monitoring and Rebalancing FinQuiz.com Alvin Richards is an international client of the asset management firm His portfolio is rebalanced using the percentage-of-portfolio rebalancing method The strategic asset allocation for Richards’ portfolio is illustrated in the exhibit below (exhibit 1) Exhibit Richards’ Strategic Asset Allocation Asset Class Strategic Asset Allocation Domestic Equities 45% ± 5.0% International Equities 25% ± 3.5% Domestic Bonds 30% ± 1.5% The equity market of the country in which Richards resides is currently rising and is expected to reverse its course as soon as arbitrageurs jump in to exploit the gains and neutralize equity priceimplicit value differences Richards has stated that he would like his equity allocations to move in synchronization with the direction of the market, increasing as the market rises and decreasing as the market falls FinQuiz Question ID: 14097 In context of the statement made by the senior portfolio manager pertaining to the benefits of using rebalancing approaches relative to ad-hoc approaches, is his statement accurate? A Yes B No, with respect to the statement referring to calendar/percentage-of-portfolio rebalancing both being disciplined approaches C No, with respect to the statement referring to the statement, “…they tend to systemize the rebalancing procedure by instituting well-defined rules…” FinQuiz Question ID: 14098 Which of the following specific benefits, shared by the senior portfolio manager, has been most accurately addressed? A B C FinQuiz Question ID: 14099 The level of McCoy’s risk aversion, in isolation, dictates a: A narrow corridor width B wide corridor width C an indeterminate corridor width FinQuiz.com © 2018 - All rights reserved Reading 32 Monitoring and Rebalancing FinQuiz.com FinQuiz Question ID: 14100 Which of the following factors, when viewed in isolation, dictates a narrow corridor width? A The diversification benefits provided by international equity securities B The low correlation between international equity securities and the rest of McCoy’s portfolio C The recently allocated illiquid securities FinQuiz Question ID: 14101 Assuming international equities are trending upwards and increase the weight of international equities in Richards’ portfolio to 27%, the most probable course of action would be to: A sell equities to rebalance the portfolio B purchase equities to rebalance the portfolio C take no action FinQuiz Question ID: 14102 Based on Richards’ statement, the rebalancing strategy he desire is most likely: A buy and hold strategy B constant-mix strategy C constant-proportion strategy FinQuiz.com © 2018 - All rights reserved .. .Reading 32 Monitoring and Rebalancing FinQuiz. com FinQuiz Item- set ID: 14096 Questions 1(14097) through 6(141 03) relate to Reading 32 Cremitia Associates Case Scenario... for significant liquidity FinQuiz. com © 2018 - All rights reserved Reading 32 Monitoring and Rebalancing FinQuiz. com Alvin Richards is an international client of the asset management firm His... corridor width C an indeterminate corridor width FinQuiz. com © 2018 - All rights reserved Reading 32 Monitoring and Rebalancing FinQuiz. com FinQuiz Question ID: 14100 Which of the following
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