An investment portfolio consists of 60% equities and 40% fixed income. If equities significantly outperform, causing the equity allocation to rise to 70%, what rebalancing strategy would bring it back to its target?

Question: An investment portfolio consists of 60% equities and 40% fixed income. If equities significantly outperform, causing the equity allocation to rise to 70%, what rebalancing strategy would bring it back to its target?

Answer options: ✅ Sell more equities and buy more fixed income.

• Sell more fixed income and buy more equities.
• Maintain the current allocation, assuming continued equity outperformance.
• Reduce the overall portfolio size.

Correct answer: Sell more equities and buy more fixed income.

Explanation: Rebalancing involves adjusting the portfolio back to its target asset allocation. If equities have become overweighted (risen to 70% from 60%), the manager would sell equities and buy fixed income to return to the 60/40 target.