Factors affecting rebalancing policy CFA Flashcards - Medical Study Cards
Master Factors affecting rebalancing policy with Oncourse flashcards. These spaced repetition flashcards are designed for medical students preparing for NEET PG, USMLE Step 1, USMLE Step 2, MBBS exams, and other medical licensing examinations.
Factors affecting rebalancing policy Flashcard Deck - 8 Cards
Flashcard 1: Including Assets in SAA
Answer: The goal in selecting asset classes for strategic asset allocation is to improve the long-term portfolio risk and return.
Theoretical effects include the effect on overall portfolio risk and return. This effect will depend on the asset class's return, stand-alone risk and correlation with other portfolio assets.
Practical effects would include issues such as liquidity, legal, tax, political, currency and other factors that vary by asset class.
Flashcard 2: Constant-Mix Strategies
Answer: - Reacts to market movements
- Target investment in stocks = m x portfolio value
- Where 0\<m\<1
- Decrease stock proportion when markets increasing, increase when they are decreasing
- Maintains portfolios systematic risk exposure
- Underperforms other two in upward trending markets due to selling winners
- Outperforms other two in downward due to selling losers
- Produces concave payoff curve
Flashcard 3: Rebalancing Disciplines
Answer: Calendar Rebalancing
- Periodic rebalancing to target weights
- Simple approach, no continuous monitoring required
- Allocations could differ significantly between rebalancing dates
Percentage-of-Portfolio Rebalancing
- Rebalancing thesholds or trigger points stated at % of portfolio value
- Requires frequent monitoring
- Tighter control of divergence from target allocation
Flashcard 4: Buy-and-Hold Strategies
Answer: - Passive do-nothing strategy
- Floor = amount invested in t-bills
- Outpeforms Constant Mix in trending markets
- Remains neutral in flat and oscillating markets
- Target stock proportion = actual stock proportion (m=1)
- Results in linear payoff curve
Flashcard 5: Rebalancing Strategy Risk
Answer: Constant Mix
- Risk tolerance varies proportionally with wealth
- Constant relative risk tolerance
Buy and Hold
- Increase with wealth but is passive
CPPI
- Increases with wealth but is active
Flashcard 6: Three Rebalancing Strategies
Answer: 1. Buy and Hold
2. Constant Mix
3. Constant Proportion
Flashcard 7: Rational Economic Man
Answer: Maximizes utility given budget constraints & available information. Governed by:
- Perfect Rationality - Ability to reason and make beneficial judgements
- Perfect Self Interest
- Perfect Information - Perfect knowledge of every subject
Those who challenge REM do so by attacking these assumptions.
Flashcard 8: Commodity Characteristics
Answer: - Used to manage portfolio risks
- Provide inflation hedge
- During financial and economic crisis, commodity prices tend to increase
- Determinants of commodity returns are economic cycle related demand, convenience yield and real options.
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