en.wikipedia.org/wiki/Constant_proportion_portfolio_insurance
1 correction found
We are now back to the original fixed weights of 120:60:620 or ratio-wise 2:1:remaining.
Those numbers do not restore the original weights. The original allocation was 100:200:700 (10%/20%/70% or 1:2:7), while 120:60:620 equals 15%/7.5%/77.5% and reverses the first two assets’ relative weights.
Full reasoning
This example’s arithmetic does not match its conclusion.
- The original allocation is 100k : 200k : 700k, i.e. 10% : 20% : 70% of the $1 million note.
- After period one, total value is 800k.
- The article says the portfolio is rebalanced to 120k : 60k : 620k.
But 120k : 60k : 620k is 15% : 7.5% : 77.5%, not the original 10% : 20% : 70%. It also flips the first two assets’ relative proportions from 1:2 originally to 2:1 after the purported rebalance.
If the goal were truly to return to the original fixed weights after the portfolio fell to 800k, the holdings would need to be 80k : 160k : 560k.
So the sentence is incorrect: the stated rebalance does not bring the portfolio back to its original fixed weights.
2 sources
- How and when will my portfolio be rebalanced?
Rebalancing is what corrects drift, bringing your portfolio back to its target allocation.
- Rebalancing your portfolio: How to rebalance | Vanguard
Let's say you have a portfolio of 70% stocks and 30% bonds ... You can either rebalance your portfolio back to the 70/30 mix ... Threshold-based rebalancing is triggered when a portfolio experiences a change in its asset allocation that exceeds a certain threshold.