An institutional pension plan in Canada has an investment policy statement that targets a 50% Canadian Equity, 30% Global Equity, and 20% Canadian Fixed Income allocation. The IPS also specifies a rebalancing corridor of ±5% for each asset class. After a period of strong performance in Global Equities, the current actual allocation is 45% Canadian Equity, 38% Global Equity, and 17% Canadian Fixed Income. Which of the following rebalancing actions is most appropriate given the IPS guidelines?

Question: An institutional pension plan in Canada has an investment policy statement that targets a 50% Canadian Equity, 30% Global Equity, and 20% Canadian Fixed Income allocation. The IPS also specifies a rebalancing corridor of ±5% for each asset class. After a period of strong performance in Global Equities, the current actual allocation is 45% Canadian Equity, 38% Global Equity, and 17% Canadian Fixed Income. Which of the following rebalancing actions is most appropriate given the IPS guidelines?

Answer options: ✅ Sell 8% of Global Equity and buy 5% Canadian Equity and 3% Canadian Fixed Income.

• Sell 3% of Global Equity and buy 3% Canadian Equity to restore the target.
• Sell 3% of Global Equity, buy 3% Canadian Fixed Income, and leave Canadian Equity unchanged.
• No rebalancing action is required, as no single asset class has exceeded its 5% corridor.

Correct answer: Sell 8% of Global Equity and buy 5% Canadian Equity and 3% Canadian Fixed Income.

Explanation: Global Equity is at 38%, which is outside its upper corridor (30% + 5% = 35%). Canadian Fixed Income is at 17%, which is outside its lower corridor (20% - 5% = 15%). Canadian Equity is within its corridor (50% ± 5%). To rebalance, 8% of Global Equity needs to be sold (38% - 30%). This 8% can then be used to bring Canadian Fixed Income up by 3% (20% - 17%) and Canadian Equity up by 5% (50% - 45%).