Question

The investment policy statement for Abigail's portfolio identifies the following desired asset allocation ranges: large cap stocks 30% - 40%, mid cap stocks 10% - 20%, small cap stocks 5% - 15%, REITs 5% - 15%, bonds 25% - 35%. Due to market conditions in which bond prices have risen and stock prices have fallen, the current portfolio allocation is as follows: large cap stocks 25%, mid cap stocks 10%, small cap stocks 2%, REITs 8%, bonds 55%. Which of the following rebalancing actions should the portfolio manager take?

a. Sell bonds, buy large, mid, and small cap stocks and REITs.
b. Sell large cap stocks, buy bonds.
c. Sell bonds, buy large and small cap stocks.
d. Sell large cap stocks and REITs, buy bonds and mid cap stocks.

Answer 1

The correct action for rebalancing Abigail's portfolio is to sell bonds and buy large, mid, and small cap stocks and REITs in order to align with the desired asset allocation ranges. Therefore, the correct option is A.

Step-by-step explanation:

The current portfolio allocation of Abigail's portfolio is not aligned with her investment policy statement's desired asset allocation ranges. She has too much invested in bonds (55%) and not enough in large cap stocks (25%), small cap stocks (2%), and REITs (8%). Therefore, to rebalance the portfolio back within the desired ranges, the portfolio manager should take action to sell some of the bonds and use the proceeds to buy large cap stocks, mid cap stocks, small cap stocks, and REITs.

The correct rebalancing action is a. Sell bonds, buy large, mid, and small cap stocks and REITs. This will help in diversifying the portfolio across the desired assets and maintain the balance of risk and return as defined by the investment policy.