A client's strategic asset allocation specifies a 5% allocation to emerging market equities. Over the past year, emerging markets have significantly underperformed, causing their weight in the portfolio to drop to 3.5%. The portfolio manager decides to sell some developed market equities and allocate the proceeds to emerging market equities to restore the 5% target. This rebalancing decision primarily reflects which principle?

Question: A client's strategic asset allocation specifies a 5% allocation to emerging market equities. Over the past year, emerging markets have significantly underperformed, causing their weight in the portfolio to drop to 3.5%. The portfolio manager decides to sell some developed market equities and allocate the proceeds to emerging market equities to restore the 5% target. This rebalancing decision primarily reflects which principle?

Answer options:

• Taking advantage of market trends ✅ Selling winners and buying losers
• Increasing diversification
• Responding to risk tolerance shifts

Correct answer: Selling winners and buying losers

Explanation: By selling developed market equities (which are likely winners, having outperformed) and buying emerging market equities (which are losers), the manager is applying the 'selling winners and buying losers' approach inherent in rebalancing back to strategic targets after market movements.