For the three-asset portfolio example used in class, which of the following is true?

Question

BlackTom AI · Accepted Answer

Rebalancing is the act of trading assets to restore target portfolio weights; the main cost components are explicit commissions, bid‑ask spreads and market impact, plus implicit costs such as realized capital gains (taxes) when positions are sold. In the three‑asset classroom example the key insight was that rebalancing does not always require incurring these costs — under certain price movements or trade-offset conditions you can rebalance with zero net trading and therefore zero explicit transaction cost.

Step‑by‑step reasoning:
1. Define target and current weights. If after market moves the current weights already equal the targets, no trades are necessary → zero cost.
2. Even when weights differ, trades can sometimes be arranged so buys and sells offset (e.g., internal crossing or exact quantity swaps) producing zero net turnover and thus zero explicit trading cost.
3. Taxes/capital gains only arise if you actually sell appreciated lots. If no sales are executed (zero trades) there are no realized capital gains; but if offsetting trades require selling appreciated lots, capital gains will occur.
4. In class we showed a specific three‑asset scenario where either the holdings already matched targets or trades could be crossed, yielding rebalancing at zero explicit cost.

Why the correct option is correct:
- Option b is true because the example included a case where rebalancing required no net trades (or could be internally crossed), so explicit transaction cost = 0.

Why the other options are incorrect:
- a (cost invariant to asset types) is false: transaction costs and liquidity differ by asset (stocks vs bonds vs ETFs), so cost depends on asset type.
- c (no capital gains resulted) is false in general: if rebalancing involves selling appreciated positions, capital gains can be realized — the class example did not claim gains were always absent.
- d (cost varied only by platform) is false: platform matters, but costs also vary by asset liquidity, trade size, and tax consequences.

Conclusion: The correct choice is "It is possible to rebalance at zero cost," which matches the provided answer.

For the three-asset portfolio example used in class, which of the following is true?多项选择题

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