Rebalancing

Trading back to target weights — a portfolio's policy weights or an index's weighting scheme — after prices have pulled holdings away. Because it sells what has risen, it is contrarian by construction.

Where you will meet it

Rebalancing appears in 46 learning outcomes on the CFA syllabus. A few of them:

• Contrast indexes weighted by price with those weighted by market capitalisation
  CFA Level I · Equity Investments

  “An equal-weighted index gives every constituent the same say, which tilts toward smaller companies and needs constant rebalancing to stay equal.”

• Work out values and returns for indexes weighted by price, by market capitalisation and equally
  CFA Level I · Quantitative Methods

  “A market-capitalisation-weighted index weights by price times shares outstanding, so the largest companies dominate and the index rebalances itself as prices move.”

• Set out the stages of the process for managing a portfolio
  CFA Level I · Portfolio Management

  “Feedback monitors the portfolio and the investor's circumstances, rebalances toward targets and measures performance against the benchmark the policy specified.”

• Explain how to measure a bond's sensitivity to each factor that moves the yield curve, and how to use those sensitivities to manage yield curve risk
  CFA Level II · Fixed Income

  “A manager can neutralise or deliberately take a shape view by rebalancing key rate exposures while leaving total duration unchanged.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with R · Glossary