A Canadian investor holds a portfolio consisting of 60% equities and 40% fixed income. After a strong market rally, the equity portion now represents 70% of the portfolio. To rebalance the portfolio back to its original target allocation, what action should the investor take?

Question: A Canadian investor holds a portfolio consisting of 60% equities and 40% fixed income. After a strong market rally, the equity portion now represents 70% of the portfolio. To rebalance the portfolio back to its original target allocation, what action should the investor take?

Answer options: ✅ Sell equities and buy fixed income.

• Buy more equities and sell fixed income.
• Sell both equities and fixed income proportionately.
• Hold the current allocation to benefit from continued equity growth.

Correct answer: Sell equities and buy fixed income.

Explanation: Rebalancing involves adjusting the portfolio's asset allocation back to its target weights. In this scenario, equities are overweight, so the investor should sell equities and use the proceeds to buy fixed income.