Question

Assess the following investments scenario from a rebalancing perspective an investor owns an equally- weighted portfolio of treasury bonds, investment grade bonds, and large cap equity securities. Over the subsequent six-month period, the treasury bonds fall by 2%, investment grade bonds fell by 6%, and equity securities rose by 12%.

Answer 1

Rebalancing a Portfolio is focused upon maintaining the old ratio of investment of different asset classes and they will be trying to continuously rebalance the portfolio to the old ratio after a specified time period.

in this case it can be seen that the equity investment has risen by 12%, so value of equity investment has to be increased in the overall portfolio in order to increase the weightage of other asset classes

It can be seen that treasury bonds and investment grade bonds have fallen and only equity I have risen, so equity investment has to be cut down or bond investment has to be increased to such levels when there would be a a similar proportion of all the Asset classes as all asset were equally invested initially and hence there would be the similar proportion of investment after specified interval according to the rebalancing philosophy of investing.