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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Portfolio Management Process

A client's policy allocation is 60% equity and 40% debt. After a strong equity rally, the portfolio stands at 70% equity and 30% debt. Which action is rebalancing back to policy weights?

Selling equity and buying debt restores the 60:40 policy mix. Equity has drifted ten percentage points above its target after the rally, so rebalancing trims the overweight asset class and adds to the underweight one.

  1. ASell equity and buy debt until the mix returns to 60:40Correct
  2. BBuy more equity to follow the momentum
  3. CHold the mix and change the policy to 70:30 without consulting the client
  4. DSell debt and buy equity to increase the equity share

Explanation

Equity is overweight by 10 percentage points and debt underweight by 10. Rebalancing means selling the overweight asset (equity) and buying the underweight asset (debt). Buying more equity would widen the deviation.

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