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11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

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Canadian Securities Course CSC

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1 Introduction & Exam Overview

About the CSC Exams

2 Chapter 1: The Canadian Investment Marketplace

1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation

3 Chapter 2: The Economy

2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar

4 Chapter 3: Features and Types of Fixed-Income Securities

3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes

5 Chapter 4: Pricing and Trading of Fixed-Income Securities

4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes

6 Chapter 5: Common and Preferred Shares

5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages

7 Chapter 6: Equity Transactions

6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations

8 Chapter 7: Derivatives

7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants

9 Chapter 8: Corporations and their Financial Statements

8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading

10 Chapter 9: Financing and Listing Securities

9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting

11 Chapter 10: Investment Analysis

10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment

12 Chapter 11: Portfolio Analysis

11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

13 Chapter 12: Alternative Investments, Other Managed, and Structured Products

12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities

14 Chapter 13: Mutual Funds

13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

15 Chapter 14: Exchange-Traded Funds (ETFs)

14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities

16 Chapter 15: Working with the Institutional Client

15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading

17 Chapter 16: Fee-Based Accounts and Working with the Retail Client

16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics

18 Chapter 17: Canadian Taxation

17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP

11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

Key Takeaways Explain This Topic AI

Strategic asset allocation sets the long-term mix; tactical allocation makes short-term shifts within IPS ranges.

Monitoring covers the client's circumstances, market movements and economic conditions.

Sharpe ratio = excess return ÷ standard deviation; Treynor ratio = excess return ÷ beta; Jensen's alpha = actual return − CAPM required return.

Rebalancing restores target weights when drift breaches IPS bands; cash-flow rebalancing avoids realizing taxable gains.

Last updated: October 2026

With objectives, constraints and the IPS in place, the manager builds and maintains the portfolio. This section covers Steps 3 to 7 of the portfolio management process: developing the asset mix, selecting securities, monitoring, evaluating performance on a risk-adjusted basis, and rebalancing.

1. Asset Allocation Strategies & Rebalancing

Academic studies show that asset allocation decisions account for more than 85% to 90% of the long-term variability in total portfolio returns , dwarfing the impact of market timing and individual security selection. Asset Allocation Hierarchy:

  • [ Total Portfolio Capital ]
  • |
  • +----------------+----------------+
  • | |
  • [ Strategic Asset Allocation (SAA) ] [ Tactical Asset Allocation (TAA) ]
  • Long-term baseline target policy - Short-term discretionary tilts
  • Driven by client IPS (e.g., 60/40) - Exploits temporary mispricings
  • Dictates 90% of long-run return - Kept within pre-authorized bands
  • 1. Strategic Asset Allocation (SAA)

The long-term baseline target asset mix designed to achieve the client's financial goals at their acceptable risk level.

SAA is established based on long-term capital market forecasts and the client's IPS constraints. A typical balanced SAA might be: 5% Cash / 35% Fixed Income / 60% Equities .

2. Tactical Asset Allocation (TAA)

Active, short-term discretionary deviations from SAA target weights to capitalize on temporary economic trends or asset class mispricings.

TAA operates strictly within pre-authorized tolerance bandwidths specified in the IPS (e.g., if Equity target is 60%, authorized range may be 50% to 70%). Once the market mispricing corrects, weights are rebalanced back to SAA targets.

3. Dynamic Asset Allocation

A rules-based, systematic strategy that automatically adjusts the asset mix in response to changing market conditions or portfolio performance (e.g., Portfolio Insurance models that systematically trim equity exposure as capital declines toward a floor value).

Rebalancing Methodologies

As asset classes grow at different rates, a portfolio's actual weights naturally drift away from target SAA weights. If left uncorrected, an equity bull market will cause the portfolio's equity weighting to expand, unintentionally elevating portfolio risk.

Rebalancing Method Operational Rule Advantages & Trade-Offs

Calendar Rebalancing Rebalance at fixed calendar intervals (e.g., quarterly, semi-annually, annually). Highly structured, simple to administer. May rebalance unnecessarily if markets have been flat, or miss severe mid-period market drifts.

Tolerance Band Rebalancing (Percentage-of-Portfolio) Rebalance only when an asset class drifts beyond a predefined percentage band around target (e.g., ± 5 % \pm 5\% ± 5% drift). Responsive to actual market volatility; prevents excessive turnover in stable markets while curbing extreme drift in volatile periods.

Cash Flow Rebalancing Direct incoming client contributions, dividends, interest, or withdrawal requests to underweighted or overweighted asset buckets. Highly tax-efficient; restores target weights without selling appreciated holdings, eliminating transaction commissions and realized taxable capital gains.

Steps 4 and 5: Selecting Securities and Monitoring

Selecting securities. Within each asset class, the manager chooses specific securities or funds that fit the IPS. Choices include individual stocks and bonds, actively managed funds or low-cost index funds and ETFs, and top-down or bottom-up selection methods. Each choice must fit the client's constraints (for example, avoiding excluded industries or meeting liquidity needs).

Monitoring. The manager watches three things continuously:

The client: changes in income, family situation, health, goals or risk profile can require a new IPS. KYC information must be updated after material changes.

The market: price moves change the portfolio's actual weights and valuations.

The economy: changes in growth, inflation, interest rates and exchange rates may justify tactical shifts within the IPS ranges.

2. Portfolio Performance Evaluation: Risk-Adjusted Metrics

Comparing raw returns alone is fundamentally flawed: a manager who generated a 15% return may have taken twice the risk of a manager who generated 12%. To determine true managerial skill, portfolio results must be measured on a risk-adjusted basis . The Three Classic Risk-Adjusted Performance Measures:

1. Sharpe Ratio: Excess return per unit of TOTAL RISK (Standard Deviation, σ).

Formula: S = (R_p - R_f) / σ_p

2. Treynor Ratio: Excess return per unit of SYSTEMATIC RISK (Beta, β).

Formula: T = (R_p - R_f) / β_p

3. Jensen's Alpha: Excess return generated over the CAPM REQUIRED RETURN.

  • Formula: α = R_p - [R_f + β_p * (R_m - R_f)]
  • 1. The Sharpe Ratio

Developed by Nobel laureate William Sharpe, the Sharpe Ratio measures the excess return earned above the risk-free rate per unit of total risk (standard deviation, σ p \sigma_p σ p ​ ):

Sharpe Ratio ( S ) = R p − R f σ p \text{Sharpe Ratio} (S) = \frac{R_p - R_f}{\sigma_p} Sharpe Ratio ( S ) = σ p ​ R p ​ − R f ​ ​

Interpretation: The higher the Sharpe ratio, the greater the return generated per unit of total volatility.

When to Use: Ideal for evaluating an entire client portfolio , an undiversified portfolio, or a standalone fund where the investor has concentrated holdings and is exposed to both systematic and unsystematic risk.

2. The Treynor Ratio

Developed by Jack Treynor, the Treynor Ratio measures the excess return earned above the risk-free rate per unit of systematic risk (Beta, β p \beta_p β p ​ ):

Treynor Ratio ( T ) = R p − R f β p \text{Treynor Ratio} (T) = \frac{R_p - R_f}{\beta_p} Treynor Ratio ( T ) = β p ​ R p ​ − R f ​ ​

Interpretation: The higher the Treynor ratio, the greater the excess return earned per unit of market sensitivity.

When to Use: Ideal for evaluating a sub-portfolio or specialized investment fund that will be added to an already well-diversified existing portfolio, where unsystematic risk has already been eliminated.

3. Jensen's Alpha ( α \alpha α )

Developed by Michael Jensen, Jensen's Alpha measures the absolute percentage return generated by an active manager over and above the return predicted by the Capital Asset Pricing Model (CAPM):

α p = R p − { R f + β p [ E ( R m ) − R f ] } \alpha_p = R_p - \{R_f + \beta_p [E(R_m) - R_f]\} α p ​ = R p ​ − { R f ​ + β p ​ [ E ( R m ​ ) − R f ​ ]}

α > 0 \alpha > 0 α > 0 (Positive Alpha): The manager generated superior returns beyond what was expected for the systematic risk taken, demonstrating active skill in security selection or market timing.

α = 0 \alpha = 0 α = 0 (Zero Alpha): The manager performed exactly in line with market risk expectations (typical of index funds after fees).

α < 0 \alpha < 0 α < 0 (Negative Alpha): The manager underperformed the CAPM benchmark; returns were inadequate to justify the systematic risk assumed.

Comprehensive Worked Numeric Comparison

A Canadian institutional pension committee evaluates two active Canadian equity managers. Over the past 3 years, the risk-free rate was 3.0% , the S&P/TSX Composite market return was 10.0% (Market Risk Premium = 10.0 % − 3.0 % = 7.0 % 10.0\% - 3.0\% = 7.0\% 10.0% − 3.0% = 7.0% ), and the market standard deviation was 14.0% .

  • Performance Metric Fund A (Maple Growth) Fund B (Northern Value)
  • Actual Annual Return ( R p R_p R p ​ ) 14.0% 11.5%
  • Standard Deviation ( σ p \sigma_p σ p ​ ) 18.0% 10.0%
  • Beta ( β p \beta_p β p ​ ) 1.30 0.80

1. Calculate Sharpe Ratios:

Fund A: S A = 14.0 % − 3.0 % 18.0 % = 11.0 % 18.0 % = 0.611 S_A = \frac{14.0\% - 3.0\%}{18.0\%} = \frac{11.0\%}{18.0\%} = 0.611 S A ​ = 18.0% 14.0% − 3.0% ​ = 18.0% 11.0% ​ = 0.611

Fund B: S B = 11.5 % − 3.0 % 10.0 % = 8.5 % 10.0 % = 0.850 S_B = \frac{11.5\% - 3.0\%}{10.0\%} = \frac{8.5\%}{10.0\%} = 0.850 S B ​ = 10.0% 11.5% − 3.0% ​ = 10.0% 8.5% ​ = 0.850

Conclusion: Fund B has a significantly superior Sharpe ratio (0.850 vs. 0.611). Although Fund A achieved a higher raw return (14.0% vs. 11.5%), it took disproportionate total risk to achieve it.

2. Calculate Treynor Ratios:

Fund A: T A = 14.0 % − 3.0 % 1.30 = 11.0 % 1.30 = 8.46 % T_A = \frac{14.0\% - 3.0\%}{1.30} = \frac{11.0\%}{1.30} = 8.46\% T A ​ = 1.30 14.0% − 3.0% ​ = 1.30 11.0% ​ = 8.46%

Fund B: T B = 11.5 % − 3.0 % 0.80 = 8.5 % 0.80 = 10.63 % T_B = \frac{11.5\% - 3.0\%}{0.80} = \frac{8.5\%}{0.80} = 10.63\% T B ​ = 0.80 11.5% − 3.0% ​ = 0.80 8.5% ​ = 10.63%

Conclusion: Fund B also dominates on systematic risk efficiency (10.63% vs. 8.46%).

3. Calculate Jensen's Alpha:

Fund A Required Return: 3.0 % + 1.30 × ( 10.0 % − 3.0 % ) = 3.0 % + 9.10 % = 12.10 % 3.0\% + 1.30 \times (10.0\% - 3.0\%) = 3.0\% + 9.10\% = 12.10\% 3.0% + 1.30 × ( 10.0% − 3.0% ) = 3.0% + 9.10% = 12.10% α A = 14.0 % − 12.10 % = + 1.90 % \alpha_A = 14.0\% - 12.10\% = +1.90\% α A ​ = 14.0% − 12.10% = + 1.90%

Fund B Required Return: 3.0 % + 0.80 × ( 10.0 % − 3.0 % ) = 3.0 % + 5.60 % = 8.60 % 3.0\% + 0.80 \times (10.0\% - 3.0\%) = 3.0\% + 5.60\% = 8.60\% 3.0% + 0.80 × ( 10.0% − 3.0% ) = 3.0% + 5.60% = 8.60% α B = 11.5 % − 8.60 % = + 2.90 % \alpha_B = 11.5\% - 8.60\% = +2.90\% α B ​ = 11.5% − 8.60% = + 2.90%

Conclusion: Both managers generated positive alpha, but Manager B generated one full percentage point more net value add ( + 2.90 % +2.90\% + 2.90% vs. + 1.90 % +1.90\% + 1.90% ) relative to the risk assumed.

Direct Comparison of Risk-Adjusted Ratios

Evaluation Metric Risk Measure Used Formula Best Application Scenario

Sharpe Ratio Total Risk ( σ p \sigma_p σ p ​ ) R p − R f σ p \frac{R_p - R_f}{\sigma_p} σ p ​ R p ​ − R f ​ ​ Evaluating an investor's entire portfolio or undiversified holdings.

Treynor Ratio Systematic Risk ( β p \beta_p β p ​ ) R p − R f β p \frac{R_p - R_f}{\beta_p} β p ​ R p ​ − R f ​ ​ Evaluating a fund to be added to an already diversified larger portfolio.

Jensen's Alpha Systematic Risk ( β p \beta_p β p ​ ) R p − [ R f + β p ( R m − R f ) ] R_p - [R_f + \beta_p (R_m - R_f)] R p ​ − [ R f ​ + β p ​ ( R m ​ − R f ​ )] Measuring the manager's percentage value added through active selection.