What is rebalancing in a portfolio and why is it performed?

• A. Restoring portfolio to target allocations after market moves.
• B. Changing investment goals.
• C. Replacing all holdings with new assets.
• D. Timing the market to buy lows.

Answer: (A)

Rebalancing is the process of bringing a portfolio back to its intended asset allocation after market moves cause drift. The goal is to maintain the risk and return profile you originally set, rather than letting one part of the mix domineer as markets rise or fall. By selling portions that have performed well and using those proceeds to buy assets that have underperformed, you systematically preserve diversification and prevent risk from creeping up beyond your plan. This can be done on a regular schedule or when allocations drift beyond a chosen threshold. The other choices describe changing goals, completely replacing holdings, or attempting to time the market, none of which define the practice of returning to the target mix.