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<title>Study Session 16 | Reading 40 | Portfolio Monitoring and Rebalancing</title>
<meta name="description" content="Chartered Financial Analyst Level 3 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<section>
<h1>Reading 40</h1>
<h3>Portfolio Monitoring and Rebalancing</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLaneWilkison</a></small>
</p>
</section>
<section>
<h2>Monitoring</h2>
<ul>
<li>Investor circumstances</li>
<ul>
<li>Investment policy statement</li>
<li>Strategic asset allocation</li>
<li>Individual portfolio holdings</li>
</ul>
<li>Market and economic changes</li>
<ul>
<li>Strategic asset allocation</li>
<li>Tactical asset allocation</li>
<li>Style/sector exposure changes</li>
<li>Individual portfolio holdings</li>
</ul>
<li>Portfolio</li>
<ul>
<li>Holdings</li>
<li>Strategic asset allocation</li>
</ul>
</ul>
<aside class="notes">
It is important to continuously and systematically track information relevant to the investment relevant to an investor's goals. Changes in investment-related factors can drive changes in one or more of the elements listed above. Broadly, changes in investor circumstances can impact the IPS, strategic asset allocation, and individual portfolio holdings. Changes in the economic or financial markets may trigger a revisitation of one's strategic and/or tactial asset allocations, style/sector exposures, and individual portfolio holdings. Finally, monitoring one's portfolio to evaluateevents and trends affecting holdings and changes in asset values creating weighting divergences from the SAA may trigger rebalancing.
</aside>
</section>
<section>
<h2>IPS Changes</h2>
<ul>
<li>Investor circumstances/wealth</li>
<li>Liquidity requirements</li>
<li>Time horizons</li>
<li>Tax circumstances</li>
<li>Laws and regulations</li>
<li>Unique circumstances</li>
</ul>
<aside class="notes">
Changes in any of the components in an investor's policy statement should be considered as they occur.
</aside>
</section>
<section>
<h2>Market and Economic Changes</h2>
<ul>
<li>Asset risk attributes</li>
<li>Market cycles</li>
<li>Central bank policy</li>
<li>Yield curve and inflation</li>
</ul>
<aside class="notes">
Changes affecting a portfolio's outlook can includes shifts in asset risk attributes, market cycles, chanegs in central bank policy, and yield curve shifts/twists and unexpected inflation.
</aside>
</section>
<section>
<h2>Portfolio Changes</h2>
<ul>
<li>Events and trends affect the prospects of individual holdings and asset classes</li>
<li>Changes in asset values that create unintended divergences from strategic asset allocation</li>
</ul>
</section>
<section>
<h2>Portfolio Rebalancing</h2>
<ul>
<li>Benefits</li>
<ul>
<li>Tracks optimal strategic asset allocation</li>
<li>Counteracts drift towards higher risk assets</li>
<li>Maintains desired risk exposures</li>
</ul>
<li>Costs</li>
<ul>
<li>Transaction costs</li>
<li>Tax costs</li>
</ul>
<li>Disciplines</li>
<ul>
<li>Calendar rebalancing</li>
<li>Percentage-of-portfolio rebalancing</li>
</ul>
</ul>
</section>
<section>
<h2>Factors Affecting Optimal Corridor Width</h2>
<img src="images/40/factors-affecting-optimal-corridor-width.png" alt="factors affecting optimal corridor width" />
</section>
<section>
<h2>Perold-Sharpe Analysis</h2>
<img src="images/40/summary-of-strategies.png" alt="relative return performance of different strategies in various markets" />
<aside class="notes">
<em>m</em> is a constant between 0 and 1 that represents the target proportion in stocks. A constant mix strategy rebalances the portfolio to a target proportion regardless of wealth (Target investment in stocks = <em>m</em>×Portfolio value). A constant-proportion strategy (CPPI) is a dynamic strategy in which the target equity allocation is a function of the value of the portfolio less a floor value for the portfolio (Target investment in stocks = <em>m</em>×(Portfolio value-Floor value).
</aside>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
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