Tolerance band

The range around a target weight within which drift is allowed. A breach triggers rebalancing, which avoids both constant trading and unlimited drift.

Where you will meet it

Tolerance band appears in 5 learning outcomes on the CFA syllabus. A few of them:

• Explain strategic asset allocation and how a portfolio is rebalanced
  CFA Level I · Portfolio Management

  “Rebalancing restores the targets, either on a calendar schedule or when a weight breaches a tolerance band.”

• Show how derivatives overlays can implement tactical allocation shifts and portfolio rebalancing
  CFA Level III · Portfolio Management Pathway

  “For rebalancing, overlays restore policy weights quickly when drift breaches a corridor.”

• Set out the strategic issues to weigh when rebalancing an asset allocation
  CFA Level III · Asset Allocation

  “Choices include calendar rebalancing at fixed intervals, percentage-range (corridor) rebalancing when a weight breaches a band, or a combination; rebalancing fully to target or partly back toward it.”

• Explain what determines an appropriate rebalancing policy
  CFA Level III · Asset Allocation

  “Corridor width should reflect a cost–benefit trade-off.”

See also

Rebalancing

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 T · Glossary