NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A client has a portfolio with a target asset allocation of 60% equities and 40% fixed income. Due to recent market movements, the equities portion has grown to 70% of the portfolio. To rebalance the portfolio, the investment adviser should:
- ADo nothing, as equities are performing well.
- BSell equities and buy fixed income.
- CBuy more equities to capitalize on momentum.
- DSell fixed income and buy equities.
Show answer & explanationAnswer & explanation
Correct answer: B. Sell equities and buy fixed income.
To rebalance back to the target allocation of 60% equities and 40% fixed income, the adviser must sell the asset class that has grown (equities) and buy the asset class that has become underweight (fixed income).
Why the other options are wrong
- A. Doing nothing would allow the portfolio to drift further from its target allocation, changing its risk profile.
- C. Buying more equities would further deviate from the target allocation and increase risk.
- D. Selling fixed income and buying equities would move the portfolio even further from its target allocation.
Portfolio Rebalancing
The process of adjusting a portfolio's asset allocation back to its original or target weights after market movements have caused it to drift.
- Maintains desired risk level.
- Typically done periodically (e.g., annually) or when drift exceeds a threshold.
- Involves selling overweight assets and buying underweight assets.
Memory trick: Rebalance your portfolio, steady your ship.