I'm not quite sure what they mean by creeping change in portfolio composition in this chapter. The fund apppears to be monitored every 6 months so I would expect it to be rebalanced, in the light of this monitoring process, every 6 months. Please can you clarify why deviating from the benchmark by a little bit during each 6 month period creates problems?
Suppose there are a few stocks in the portfolio that alter their risk profile by changing the type of business they undertake over the 6 months. ‘Risk’ will be measured by standard deviation of historical returns, over a longer period than 6 months. It will take a while before the change feeds through to measured standard deviation, so there will be a period when the stocks risk level is understated. That’s what I’ve assumed it to mean anyway.
I think it is slightly different. Every 6 months you change the portfolio composition slightly and historical volatility is measured over a period > 6 months. Thus historical volatility will not be an accurate measure of current risk.
