NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Construction Process
A client's strategic allocation is 50% equity and 50% debt. After a market rally the portfolio is 62% equity and 38% debt. Which action restores the target under a calendar or threshold rebalancing policy?
The adviser should sell equity and buy debt. Equity has grown to 62% against a 50% target, so it is overweight. Rebalancing brings the portfolio back to the strategic weights and restores the intended risk level agreed with the client.
- ABuy more equity and sell debt
- BSell equity and buy debtCorrect
- CDo nothing, as drift is always beneficial
- DSell both equity and debt and hold cash
Explanation
Equity is overweight by 12 percentage points, so rebalancing means selling equity and buying debt until the weights return to 50:50. Buying more equity would widen the drift.
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