A $10 million institutional portfolio has a target allocation of 60% Canadian Equities, 30% Global Equities, and 10% Canadian Fixed Income. During a period of strong market performance, Canadian Equities grew to 68% of the portfolio, Global Equities to 32%, and Canadian Fixed Income declined to 0%. The portfolio manager uses a 5% drift band for rebalancing. What rebalancing action is required?

Question: A $10 million institutional portfolio has a target allocation of 60% Canadian Equities, 30% Global Equities, and 10% Canadian Fixed Income. During a period of strong market performance, Canadian Equities grew to 68% of the portfolio, Global Equities to 32%, and Canadian Fixed Income declined to 0%. The portfolio manager uses a 5% drift band for rebalancing. What rebalancing action is required?

Answer options: ✅ Sell 8% from Canadian Equities, sell 2% from Global Equities, and buy 10% into Canadian Fixed Income.

• Sell 6.8% from Canadian Equities, sell 3.2% from Global Equities, and buy 10% into Canadian Fixed Income.
• No rebalancing is strictly required as the Canadian Fixed Income exposure is below its target but within acceptable limits when considering portfolio growth in other asset classes.
• Sell Canadian Equities until it is 63% and Global Equities until it is 31%, then reallocate to Canadian Fixed Income until it is 10%.

Correct answer: Sell 8% from Canadian Equities, sell 2% from Global Equities, and buy 10% into Canadian Fixed Income.

Explanation: The current Canadian Equities (68%) and Global Equities (32%) are outside their +5% drift band (60% + 5% = 65% and 30% + 5% = 31.5%, respectively). Canadian Fixed Income (0%) is below its -5% drift band (10% - 5% = 5%). The portfolio manager needs to sell a net 8% from Canadian Equities (68%-60%) and a net 2% from Global Equities (32%-30%) to buy 10% into Canadian Fixed Income.