Question

You like to keep your investment risks at a 79–15–6 proportion (stocks-bonds-cash). After the first year, your $38,000 investment doubled in value to $76,000, with $60,800 in stock, $10,800 in bonds, and $4,400 in cash. How should you allocate your assets to maintain your original goals and rebalance your portfolio to retain the 79–15–6 proportion in investments? (Input all amounts as positive values.)

allocation original goals action to rebalance rebalance

stocks

bonds

cash

Answer 1

The new value of the portfolio ($76,000) must be allocated in the 79–15–6 proportion.

To maintain your original goals, required allocation is :

• Stocks = $60,040
• Bonds = $11,400
• Cash = $4,560

To rebalance, the following actions should be taken :

• Sell $760 of stocks
• Buy $600 of bonds
• Keep $160 in cash