How do portfolio rebalancing strategies work?

How do portfolio rebalancing strategies work?

• A. They create new investment options
• B. They involve selling all assets
• C. They adjust asset allocation to maintain intended risk levels
• D. They solely focus on liquidating assets

Answer: (C)

Portfolio rebalancing strategies are essential for maintaining an investor's intended risk level and asset allocation over time. When an investor first creates a portfolio, they set target allocations across different asset classes based on their risk tolerance, investment goals, and market conditions. Over time, as markets fluctuate, the values of the assets will change, which can lead to an imbalance in the intended asset allocation. Rebalancing involves adjusting the portfolio back to its original or desired allocation by buying or selling assets as necessary. For example, if stocks have significantly outperformed bonds, the stock allocation may become much larger than intended, increasing overall portfolio risk. Rebalancing helps to realign the weights of the different assets, bringing the portfolio back to a state that reflects the investor’s risk profile. This helps manage risk and ensures the portfolio remains aligned with the investor's goals. Other options do not accurately describe the purpose or function of portfolio rebalancing. Creating new investment options or focusing solely on liquidating assets does not address the fundamental strategy of maintaining balance in a portfolio, while selling all assets is contrary to the goals of portfolio rebalancing, which is to manage and adjust, rather than completely liquidate.

Portfolio rebalancing strategies are essential for maintaining an investor's intended risk level and asset allocation over time. When an investor first creates a portfolio, they set target allocations across different asset classes based on their risk tolerance, investment goals, and market conditions. Over time, as markets fluctuate, the values of the assets will change, which can lead to an imbalance in the intended asset allocation.

Rebalancing involves adjusting the portfolio back to its original or desired allocation by buying or selling assets as necessary. For example, if stocks have significantly outperformed bonds, the stock allocation may become much larger than intended, increasing overall portfolio risk. Rebalancing helps to realign the weights of the different assets, bringing the portfolio back to a state that reflects the investor’s risk profile. This helps manage risk and ensures the portfolio remains aligned with the investor's goals.

Other options do not accurately describe the purpose or function of portfolio rebalancing. Creating new investment options or focusing solely on liquidating assets does not address the fundamental strategy of maintaining balance in a portfolio, while selling all assets is contrary to the goals of portfolio rebalancing, which is to manage and adjust, rather than completely liquidate.