What does rebalancing a portfolio entail?

• A. Selling overperforming assets and buying underperforming ones to restore the target allocation.
• B. Investing equally in all asset classes regardless of performance.
• C. Holding the same mix regardless of changes in the market.
• D. Diversifying across assets but not rebalancing.

Answer: (B)

Rebalancing a portfolio means returning the investment mix to its target weights after market movements have shifted those weights. When some assets outperform and others lag, their shares in the portfolio drift away from the plan. Rebalancing involves selling assets that have grown beyond their target share and using those proceeds to buy assets that have fallen below their target share, bringing the portfolio back to the intended balance.

Example: with a target of 60% stocks and 40% bonds, stocks rise so the mix becomes 70% stocks and 30% bonds. Rebalancing would sell some stocks and buy bonds to return to 60/40. This helps maintain the level of risk you planned and keeps diversification aligned with your plan.

Other options describe different ideas: investing equally in all asset classes regardless of performance is about equal weighting, not maintaining a planned mix. Holding the same mix regardless of market changes is buy-and-hold without adjustment. Diversifying across assets but not rebalancing means you’re spreading risk but not correcting drift back to the target allocation.