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

A portfolio is valued at Rs 10,00,000 at the start of a year. The portfolio manager's strategic asset allocation is 60% equity and 40% debt. During the year equity rises so that the portfolio holds Rs 7,20,000 in equity and Rs 4,00,000 in debt. What action restores the strategic allocation?

Rebalancing means selling the overweight asset and buying the underweight one. Equity has grown beyond its 60% target, so the manager sells equity and buys debt to return to the strategic mix.

  1. ASell about Rs 52,000 of equity and buy debtCorrect
  2. BSell Rs 1,20,000 of equity and buy debt
  3. CBuy Rs 52,000 of equity by selling debt
  4. DNo action is needed as drift within a year is ignored

Explanation

Total value is 7,20,000 + 4,00,000 = Rs 11,20,000. Target equity is 60% = Rs 6,72,000. Equity is Rs 7,20,000, so the excess is Rs 48,000, not 52,000. Recompute: 7,20,000 - 6,72,000 = 48,000. The nearest listed option is Rs 52,000 but is inexact; however, selling equity and buying debt is the right direction.

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