M ONITORING & R EBALANCING Portfolio Management Prof. Ali Nejadmalayeri

Monitoring What needs to monitored –Investor’s Circumstances Investment Policy, Strategic Allocation, Holdings –Market and Economic Changes Asset risk attributes Market cycles Central Bank Policy (Monetary Policy) Yield curve and Inflation –The Portfolio Itself Events and circumstances that change suitability of the entire portfolio, asset classes, and holdings Unintended divergence from strategic allocation

Rebalancing Purpose –Bringing back the portfolio in-line with long-term strategic goals Benefits –Keeping it “optimal” –Avoid unintended, unwarranted risk exposures –Avoid holding overpriced securities Costs –Transaction costs –Tax costs

Rebalancing Disciplines Calendar rebalancing –Every so often rebalance Percentage-of-Portfolio Rebalancing –Defined “corridors” or “tolerance bands” Equal Probability Rebalancing –Corridors are based on volatility of asset classes Tactical Rebalancing –Less (more) frequent when “good (bad)” market

Constant Mix or What? Buy-and-Hold Strategy –Upside limited but not lower than bond portion –Linear link to stock performance –Risk tolerance is positively linked to stock returns Constant Mix Strategy –Target investment = m  Portfolio Value –Concave strategy; outperforms in flat markets Constant Proportion Strategy –Target investment = m  (Portfolio Value – Floor) –Convex strategy; outperforms in ups or downs