Optimal Rebalancing Strategy for Portfolio

Very Hard Investment Policy And Allocation Rebalancing

Consider an institutional investor with a target asset allocation of 60% equities, 30% fixed income, and 10% alternative investments. Over the past year, equities performed exceptionally well, increasing to 70% of the portfolio, while fixed income fell to 25%, and alternatives dropped to 5%. The investor follows a quarterly rebalancing strategy to maintain the target allocation.

Given these circumstances, the portfolio manager must decide how to rebalance the portfolio during the next quarter.

What would be the most appropriate rebalancing action for the portfolio manager to take in order to align the portfolio back to its target asset allocation?

Sell 10% of equities and invest the proceeds equally in fixed income and alternatives.

Sell 20% of equities to bring the allocation back to 60% and use the proceeds to buy fixed income.

Hold the current allocation as it is due to the recent strong performance of equities.

Hint

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