corridors

Yes. For volatility, their (CFAI) argument was, if the volatility was high and the corridor is wide, it would be too late to stop things from getting worse.
It took me a while to get this one straight when I study.
 
bhill020 Wrote:
——————————————————-
> Gold price increased - no effect on corridor
> Reduced volatility - WIDER (according to CFAI
> text)
> Reduced transaction costs - NARROWER (accoridng to
> CFAI text)
Same answer
 
me 2. I remembered it as: everything that reduces, also narrows the corridor, EXCEPT for volatility.
Gold price change is a characteristic of the market, you can’t change corridors every time that happens.
 
i think it explicitly said that that gold prices was the single determinant of the commodity index( holding) in the portfolio. So since commodities have a low correlation with stocks and bonds, they are more likely to move out of sink in thier portfolio allocations. What tripped me up was the it already had a narrow corridor to start with, but what i also noticed is that it also had only a 5% allocation in the portfolio, so it would make sense why it would have a narrow corridor already. So that is why i put narrower since commodities have a low correlation with stocks and bonds and are more likely to need to be reballanced back to thier 5% allocation on the portfolio.
 
the question started by saying that the manager was reviewing the long-term objectives of the IPS
a change in the price of gold wouldnt warrant a change in the strategic asset allocation or its corridors
 
bhill020 Wrote:
——————————————————-
> Gold price increased - no effect on corridor
> Reduced volatility - WIDER (according to CFAI
> text)
> Reduced transaction costs - NARROWER (accoridng to
> CFAI text)
Agree 100% with all the above.
 
About Gold prices:
I answered “Narrower”. My reason was that these corridors are there because of the risk of drift. If the IPS states the the policy weight is fx. 5% then gold should stay close to the 5%. If the risk of Gold straying far from 5% the corridor should be relatively narrow. Because there was a high probability (risk) of significant increase in gold price there is an increased risk of the gold-weight straying from 5%. Therefore a need for a narrower corridor to enusre that gold not suddenly make up fx. 6% of portfolio….
 
I contend that - as gold prices go up liquidity will go down ==> less trading and thus wider corridor
 
^^ that’s just stupid.
Sorry about that. You state the case for rebalancing, not for changing the corridor.
 
I put no effect anyways…Just tried to start some kind of debate with Greedo. I guess it was a pretty stupid statement
 
Maybe it´s not correct, but you can´t separate the case for rebalancing and the corridor decision:
“The with of the corridors also depends upon the client´s (especially private wealth clients) aversion to changes in the portfolio allocations. If the client is significantly averse to changes in the portfolio allocation, the widths of all the asset class corridors should be narrower than if the client is not averse. The bottom line is that we can think of risk tolerance in the conventional framework, as it applies to the variability of the portfolio´s return, OR as it applies to changing allocation corridors”. The client was averse to canging relative allocations because of certain constraints in the IPS
Furthermore, as I remember it, nothing about the correlation between gold prices and other assets were mentioned - only that gold prices were expected to increase. Because the client was averse to changes in the relative portfolio allocations the expected increase in gold prices was a risk factor. The narrow corridor was there to “trigger” a rebalancing before the portfolio weight of gold got too high.
You could say why sell if you expect gold prices to increase further. But it is not relevant in this case
 
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