NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Portfolio Management Process
Rebalancing a PMS portfolio to its target asset allocation after equities have rallied sharply would generally involve which action?
The manager would sell some equities and add to underweight asset classes. Rebalancing brings the portfolio back to the target allocation agreed with the client, which controls drift in risk after one asset class has risen well above its intended weight.
- ASelling some equities and adding to the underweight asset classesCorrect
- BBuying more equities to ride the momentum
- CChanging the client's stated risk tolerance
- DStopping all further reviews of the portfolio
Explanation
Rebalancing restores the weights set in the strategic allocation. After an equity rally, equities are overweight, so the manager trims them and increases underweight assets. Buying more equities would increase the deviation from target.
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