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27 Cards in this Set
- Front
- Back
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What is Rebalncing.
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Rebalncing shifts the portfolio in its original asset allocation.
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Why the rebancing is nessary (list 3) ?
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1. without relancing a optimal asset allocation could not be achieved.
2. without rebalancing there may exists a appotunity costs 3. Risk level of the portfolio may not fit all the time the risk objective, so the deviation of risk tolerance may be overcome by rebalancing. |
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What are the costs of relanacing (list 3).
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1. Trading costs (commisiosn, impact, timinng)
2. Long term v/s short term capital gains 3. time value of the tax deferrals. |
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What can happen when relbalancing is done too frequently ?
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trading costs may exceed the apportunity costs.
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Rebalancing decision is also be influenced by ?
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risk tolerance level of an investor.
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What are rebalancing Methods used (list 2) ? Consier Advante and disadvantage under those methods ?
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1. Calander rebalancing - periodic basis (e.g monthly, quaterly) frequency is based on the volatility of the asset - e.g. bonds less frequent.
Advantage - Discipline disadvantage - portfolio may diavate between two periods. 2. Percentage-of-portfolio rebalancing (PPR) . Tolerance bands (corridors are set) Advantage - Immediate rebalancing as soon as the corridors violated. Disadvantage - higher costs as portfolio need the be monitor continuously. |
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On what factors the optimal corridor width depends on ? (list 4) and consider why ?
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- Volatility (more volatile asset needs larger corridors)
- Risk level of the Investor (high risk averse investor may only tolerate limited corridors ) - Correlation between the assets classes (highly correlated assets need to be defined with smaller corridor width to cover the risk) - Transaction costs ( asset classes with high transaction costs should have wider bands) |
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what types of dynamic Strategies available ? (list 4)
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- buy and hold (drifiting mix)
- contant mix (CM) - Constant perportion (CP) or Constant perportion portfoio Insurance (CPPI) - Option based portfolio insurance |
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What are the pros and cons of buy and hold stretegie ?
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pros
- no commision, no management fees. cons - Holding overpriced asset (opportunity costs), inefficient portfolio, portfolio no longer setiesfies client returns objectives. |
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make a rebalcing example when stock has goen down and up by 10% under a portfolio with 60% shares and 40 bonds .
What will be the new adjustments ? |
down case
- buy 2.4 unit of stock and sell 2.4 unit of bonds. Up case - - sell 2.4 unit of stock and buy 2.4 unit of bonds. |
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What s effect on the slope of Exposure diagram (when value of the portfolio goes up with a ration 0.5 )?
(Value of the portfolio v/s Disered Position in risky asset ) |
slope will become 1
Figure on page 9 script : Rebalancing |
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what is the relation of the portfolio value with the performance of the risky asset in Buy and Hold stretegy ?
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linier, slop of the relationship equal to the initial percentage invested in risky asset.
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what is the floor value of in BH ?
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initial value invested in risk-free asset.
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on which component depend the risk under BH rebalcing ? and what about the risk tollerence ?
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Risk depend on the initial percentage invested in Risky asset. risk tolerance is directly related to wealth. Zero risk tolerance when the wealth reaches the floor.
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Draw a Payoff diagram and exposure diagram for BH stretegy ?
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Page 9 on Script Portfolio controling
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What is a Constant Mix (CM) Stretegy or Buy low sell High Stretegy ?
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Here the Rebalancing is made to keep the same perportion of the risky asset in the portfolio.
when the price of risky asset goes down, more asset unit are purchased to keep the constant ratio. and when price goes up vice-versa. Example on Page 11 script Portfolio Controlling. |
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why is the payoff diagram for a contact mix strategy not linier.
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when the pise of risky asset falls , even for a same decrease of price because of sell and buying of new stock, transaction charges need to pay making the portfolio falling down sharply.
when the pirce of the risky asste goes up with high values because of variable trancaction costs portfolio value will not increase in the ratio of the asset price, in such cases transaction cost may be high. |
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when does CM outperform and does the uderpeform ?
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outperform - when market reversals accurs
underperform - when market are establised. |
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what about the risk tollerance and floor value for CM strategy ?
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risk tollerance is constant.
floor = floor is variable , could be lead to zero when the portfolio value reduced to a very low value. |
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constant proportion Portfolio Strategy (CP)? (Formula)
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In this strategy a constant perportion of the portfolio is secured with the Formula :
Amount invested in risky Asset = m * (Total Asset - floor) |
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Where the Buy and sells takes place for s CP Strategy ?
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Buy is done in the up market, sell is done in the lower market.
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Payoff Diagarm and exposure diagram for CP strategy ?
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Picture from Iphone, Page 15 Script : portfolio Controlling.
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In welschem Markt wird and Positives und eine negetives return wird erwartet unter CP Stretegie ?
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Wenn markt is stark and stabil wird ein Positives Return erwartet. und umgekehrt erwartet wird in eine volatiles markt ?
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Risk tollerence considration under CP strategy ?
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Assume that risk tollerance is directly related to wealth.
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What are the Rebalancing Strategies peference in the following markets .
1. Flat market. 2. Flat but Oscillating Market. 3. Trending markets. |
1. Flat market
B&H = CM = CP 2. Oscallating market : CM > B&H > CP 3. Trending markets CP > B&H > CM |
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what do you understand with CPPI ?
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Constant Proportion Portfolio Insurance. - as the name a Constant Proportion (Floor value) of the Intial Portfolio Struture is always insured. Example if Total Asset $100 and floor is $75 , then the amount of $75 is always insured.
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Was sind hubtsächlich Kosten für Rebalancing ?
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Haubtsächlich Tradingkosten.
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