On this page
State the allocation rule
This illustrative portfolio begins with 20% in Energy, 40% in Industrials and 40% in Financials. The rule removes Energy and preserves the relative weights of the two remaining sectors. No expected-return or covariance estimates are supplied.
Rescale the remaining weights
The retained allocations sum to 80%. Divide each retained weight by 80% to restore the total to 100%. Each retained 40% weight becomes 40%/80% = 50%.
| Sector | Original weight | New weight |
|---|---|---|
| Energy | 20% | 0% |
| Industrials | 40% | 50% |
| Financials | 40% | 50% |
| Total | 100% | 100% |
Explain what changed
The remaining sectors each gained ten percentage points of portfolio weight. A total weight of 100% does not mean the risk exposures stayed unchanged. The allocation now differs from the starting benchmark and can create tracking differences.
Identify what the numbers cannot establish
The weights alone do not determine volatility, expected return or a Sharpe ratio. Those require additional estimates and conventions. Mechanical pro-rata reallocation should not be described as proof that an exclusion improves investment performance.