In light of your new capital allocation, should you adjust the size of this position?
For many experienced risk takers, this scenario presents a very real quandary. However, if your goal is to always make optimal, purely objective decisions, the only rational answer is yes, you should double the size of all positions in order to maintain the same proportional exposure to the portfolio. Of course, this is predicated on the assumption that you had made a balanced and objective decision regarding this position before you received the email from your CIO.
For example, if you had decided this position should represent 50 basis points of risk to your portfolio before the increase, it should represent 50 basis points of risk after it. If instead you choose to do nothing, you will actively reduce your exposure to 25 basis points, thereby effectively ceding control of a trading decision to an unwitting 3rd party. If you are willing to do so now, why not make all trading decisions in a similarly random manner, such as by the flip of a coin? The only reason not to make the adjustment is if the current offer is at or above your take profit level (and vice versa for a short position). There is the possibility that you remain unconvinced, and in that case you have proof that your portfolio review prior to the email was lacking in conviction. If this applies to you, take note of just how biased you are toward doing nothing.
Would your answer change if you were the only portfolio manager in the fund and rather than receiving an increase from your CIO, the unexpected increase was from a sudden inflow from an investor?
No. Whether you are a portfolio manager independently managing capital allocated to you by your firm or directly invested with you by an investor, the decision making process should be identical. If your previous answer was riddled with uncertainty, but made clear when rephrased in Question 1b, you have a potential tool for improving your decision making going forward.