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The Objectives Of This Paper Are: (1) To Analyze An Optimal Portfolio Rebalancing By A Fund Manager In Response To A Volatility Shock In One Of The Asset Markets, Under Sufficiently Realistic Assumptions About The Fund Manager's Performance Criteria And Investment Restrictions; And (2) To Analyze The Sensitivity Of The Equilibrium Price Of An Asset To Shocks Originating In Other Fundamentally Unrelated Asset Markets For A Given Mix Of Common Investors. The Analysis Confirms That Certain Combinations Of Investment Restrictions (notably Short-sale Constraints And Benchmark-based Performance Criteria) Can Create Additional Transmission Mechanisms For Propagating Shocks Across Fundamentally Unrelated Asset Markets. The Paper Also Discusses Potential Implications Of Recent And On-going Changes In The Investor Base For Emerging Market Securities For The Asset Price Volatility. Contents; I. Introduction; Ii. The Model; Iii. Optimal Investment Rules; Iv. Equilibrium Framework; V. Conclusions; References Anna Ilyina. September 2005. Includes Bibliographical References (p. 33). English