Rebalancing: Strategy, Factors, and Corridor

Rebalancing: Strategy

Rebalancing: Strategy	Constant Mix	Constant Proportion (e.g., CPPI)	Buy and Hold
Optimal for investors with a floor value?		a floor value which limits his or her willingness to take risks if one's portfolio declines below that value	floor value >= 0
Optimal for investors with absolute risk tolerance that:	varies proportionately with wealth 0 < one's multiplier < 1	varies by more than any change in one's wealth  one's multiplier > 1	one's multiplier = 1
GOOD performance if markets are	Ups and downs (mean-reversion, or "volatile" markets)	Trending (with no or few reversals)	in the middle of Constant Mix and Constant Proportion
POOR performance if markets are	Trending (with no or few reversals)	Ups and downs	in the middle of Constant Mix and Constant Proportion
Payoff Curve	Concave (*1)	Convex	Linear

Also, Calendar Strategy's Rebalancing Frequency depends on volatility of asset class in the portfolio.

(*1) It supplies liquidity to the market, in effect "selling insurance" by taking the less popular side of trades when the market is trending up or down.

Rebalancing: Factors

#	Factor
1	Volatility	High		Low
2	Frequency	Infrequent	Appropriately frequent	Too frequent
	Market Impact / Trading Cost	High Asset mix can drift to the point where rebalancing could create a market impact, thus increasing the cost of trading dramatically.	Low Market impact will be lower with more frequent rebalancing.	High Portfolio could incur numerous costly small trades to achieve minor adjustments in the asset mix.

Rebalancing: Corridor

#
1	Risk tolerance		High
2	Flexibility for the asset allocation relative to the target mix		High
3	Volatility			Low	High
4	Correlation with the rest of the portfolio			High	Low
5	Transaction Cost			High	Low
	Rebalancing Corridor Width		Wide	Wide	Narrow (*2)

(*2) The narrow corridor means that small changes in value may necessitate rebalancing.