Rebalancing. CB example 8. Corridor width problem..

[Kyungshin Cho]

When there are Asset A,B,and C in a portfolio, if the volatility of asset B has increased,
how asset C’s corridor should be corrected?
I understood the example no.8 - 5) in CB Reading31 is the same as the above question…
Can anyone explain why asset class C’s corridor should be narrower?

 

[Glue85]

Okay if the volatility of any of the assets classes have increased the weights of the asset classes will deviate from optimal SAA. Say Class A volatility increased causing its weight to decrease from 10% to 6% so all other classes will be deviated from their optimal weights this will cost a lot to rebalance the portfolio. Also high volatility will increase risk which make narrower corridor more suotable to highely risk averse

 

[Kyungshin Cho]

Awesome! Thanks a lot!