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CFA Level I · CFA Level I Exam · Portfolio Management: An Overview

An investor's policy allocation is 60% equities and 40% bonds with a tolerance of plus or minus 5 percentage points for each asset class. After a strong equity rally, the portfolio is 66% equities and 34% bonds. Under a percentage-range rebalancing policy, the manager would most likely:

The manager would most likely sell equities and buy bonds. Equities at 66% breach the 65% upper limit and bonds at 34% fall below the 35% lower limit, so the percentage-range policy requires trading back to target or into the band.

  1. Atake no action because the portfolio is still diversified
  2. Bsell equities and buy bonds to restore the target weights or move to within the bandCorrect
  3. Cbuy more equities to maintain the portfolio's momentum

Explanation

Equities at 66% exceed the 65% upper limit and bonds at 34% are below the 35% lower limit. The policy therefore calls for selling equities and buying bonds, either to the 60/40 target or back inside the band.

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