What is portfolio rebalancing and why is it done?

Prepare for the CSI Investment Funds in Canada exam with flashcards and multiple choice questions. Gain insights through hints and explanations for a successful exam experience!

Multiple Choice

What is portfolio rebalancing and why is it done?

Portfolio rebalancing is bringing the portfolio back to its target asset mix after market movements cause drift. When markets move, some holdings become overweight while others underperform, so the actual weights diverge from the plan. Rebalancing sells assets that have grown and uses those proceeds to buy assets that have fallen, nudging the portfolio back toward the intended allocation. This helps maintain the defined risk/return profile and keeps diversification on track, preventing overexposure to any single asset class. It can be done on a regular schedule or when allocations stray beyond predefined thresholds, and should consider costs, taxes, and liquidity. Actions like setting the cash position to 100%, changing the fund’s mandate to new sectors, or increasing leverage are not rebalancing. They alter cash levels, objectives, or risk in ways that don’t simply restore the target mix.

Portfolio rebalancing is bringing the portfolio back to its target asset mix after market movements cause drift. When markets move, some holdings become overweight while others underperform, so the actual weights diverge from the plan. Rebalancing sells assets that have grown and uses those proceeds to buy assets that have fallen, nudging the portfolio back toward the intended allocation.

This helps maintain the defined risk/return profile and keeps diversification on track, preventing overexposure to any single asset class. It can be done on a regular schedule or when allocations stray beyond predefined thresholds, and should consider costs, taxes, and liquidity.

Actions like setting the cash position to 100%, changing the fund’s mandate to new sectors, or increasing leverage are not rebalancing. They alter cash levels, objectives, or risk in ways that don’t simply restore the target mix.

More practice questions