Final answer:
Portfolio rebalancing is the process of buying and selling securities within a portfolio to restore its original asset allocation.
Step-by-step explanation:
The process of buying and selling securities within a portfolio to restore its original asset allocation is known as portfolio rebalancing. It is a strategy used by investors to maintain the desired risk-return profile of their portfolio over time.
For example, let's say an investor initially allocates 60% of their portfolio to stocks and 40% to bonds. Over time, due to market fluctuations, the stock portion grows to 70% while the bond portion decreases to 30%. To restore the original asset allocation, the investor would sell some stocks and buy more bonds, bringing the portfolio back to its desired allocation of 60% stocks and 40% bonds.
Portfolio rebalancing helps investors manage risk and maintain a diversified portfolio. It ensures that the portfolio does not become too heavily exposed to one asset class, which could lead to greater volatility and potential losses.