Set out the strategic issues to weigh when rebalancing an asset allocation
The idea
Rebalancing restores the portfolio to its policy risk profile after market moves. Choices include calendar rebalancing at fixed intervals, percentage-range (corridor) rebalancing when a weight breaches a band, or a combination; rebalancing fully to target or partly back toward it. Considerations include transaction costs and taxes, which argue against frequent trading; the investor's risk tolerance; the volatility and correlation of each asset with the rest of the portfolio; liquidity, since illiquid assets are hard to trade; and beliefs about momentum versus mean reversion. Leveraged portfolios drift faster and need more frequent attention. Disciplined rebalancing sells recent winners and buys losers, which is behaviourally hard. The trap is treating no rebalancing as neutral when it lets risk drift.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Overview of Asset Allocation
- Set out what good investment governance looks like and how governance shapes asset allocation decisions
- Construct a client's economic balance sheet and draw out what it implies for how assets should be allocated
- Contrast what goals-based, liability-relative and asset-only allocation each set out to achieve
- Contrast how risk is defined when allocating on a goals-based, liability-relative or asset-only basis
- Explain how asset classes serve as building blocks for systematic risk exposures and set out the tests for defining an asset class
- Explain how risk factors are used in asset allocation and how they relate to allocation by asset class
- Propose an asset allocation suited to what the investor wants to achieve and the limits they face, and defend it
- Explain how the global market portfolio serves as a neutral starting point for asset allocation
- Set out the strategic choices in implementing an allocation, including how passive or active to be and which vehicles deliver each type of mandate