Portfolio rebalancing is the process of bringing the different asset classes (stocks, bonds, and cash) back into a proper relationship following a significant change in the value of one or more of them. You should normally rebalance your portfolio once a year to return your investments to the proper balance when they no longer conform to your investment plan. Suppose that you begin an investment program with a portfolio that has an asset allocation of 40% bonds, 40% equities, and 20% cash investments. One year later, some investments have performed better than others. After a year the portfolio now consists of 30% bonds, 60% equities, and 10% cash investments. To rebalance this portfolio back to its original asset allocation, you should sell some of your ___________ and use the proceeds to purchase additional shares of _______________________.

Respuesta :

Answer:

To rebalance this portfolio back to its original asset allocation, you should sell some of your __equities_________ and use the proceeds to purchase additional shares of ___bonds ___and____cash investments___.

Explanation:

a) Data:                  

Assets allocation       Plan    After Year 1     Rebalancing

Bonds                         40%         30%              40% (30% + 10%)

Equities                      40%         60%              40% (60% - 20%)

Cash investments     20%          10%              20% (10% + 10%)

Total Portfolio          100%        100%             100%

b) To rebalance this portfolio, 20% of equities need to be sold.  The proceeds will be utilized to buy more bonds to increase it by 10% and also buy more cash investments, increasing it also by 10%.