A client, aged 45, with a moderate risk tolerance and long-term investment horizon, has a strategic asset allocation targeting 60% equities and 40% fixed income. Due to an unexpected market downturn, their current portfolio now stands at 50% equities and 50% fixed income. Which of the following best describes the action required to restore their portfolio to the strategic target?

Question: A client, aged 45, with a moderate risk tolerance and long-term investment horizon, has a strategic asset allocation targeting 60% equities and 40% fixed income. Due to an unexpected market downturn, their current portfolio now stands at 50% equities and 50% fixed income. Which of the following best describes the action required to restore their portfolio to the strategic target?

Answer options: ✅ Rebalancing by selling fixed income and buying equities.

• A tactical asset allocation shift towards fixed income.
• Rebalancing by selling equities and buying fixed income.
• Adjusting the strategic asset allocation to reflect current market conditions.

Correct answer: Rebalancing by selling fixed income and buying equities.

Explanation: Rebalancing involves adjusting the portfolio back to its original strategic asset allocation weights after market movements have caused deviations. In this case, to increase equity exposure and decrease fixed income exposure, selling fixed income and buying equities is the appropriate action to return to the 60/40 target.