A client has a strategic asset allocation targeting 60% equities and 40% fixed income. Due to strong equity market performance over the last quarter, their portfolio now consists of 70% equities and 30% fixed income. If their rebalancing trigger is a 5% deviation from strategic weights, what action should be taken?

Question: A client has a strategic asset allocation targeting 60% equities and 40% fixed income. Due to strong equity market performance over the last quarter, their portfolio now consists of 70% equities and 30% fixed income. If their rebalancing trigger is a 5% deviation from strategic weights, what action should be taken?

Answer options: ✅ Sell 10% of equities and buy 10% of fixed income to restore original weights.

• Sell 5% of equities and buy 5% of fixed income, as the trigger is met.
• No rebalancing is required, as the deviation is within acceptable limits.
• Sell all fixed income and reinvest it into equities to maximize returns.

Correct answer: Sell 10% of equities and buy 10% of fixed income to restore original weights.

Explanation: The current equity weight is 70% and the target is 60%, a deviation of +10%. For fixed income, the current weight is 30% and the target is 40%, a deviation of -10%. Since both deviations exceed the 5% rebalancing trigger, the portfolio should be rebalanced back to its strategic weights by selling 10% of equities and buying 10% of fixed income.