Question

Multiple Choice

If you had a portfolio that consists of 60% equity and 40% bonds—considering what has happened to stock markets due to Covid-19—what happens when your portfolio re-balances?

a) More bonds are bought to "de-risk" the portfolio

b) Despite the crash-- sell some bonds and buy equities

c) Re-balance out of a passive to an active strategy

d) Move cash into the portfolio in a 60/40 stock/bond split

Answer 1

When the market fell because of the widespread of the Covid -19, the equity market fell sharply and the demand for bond increased and so the required return on them decrease. When the rate on bond decreases the value of the bond increases so earlier the 60% stock and 40% bond value would not be maintained so if you want to rebalance the portfolio to the desired 60% stock and 40% bond, you would have to sell the bond and invest in equity.

Hence the correct answer is

b) Despite the crash-- sell some bonds and buy equities

Other options are not correct because if you buy more bond the weight will be skewed towards bond. Passive to active strategy is not discussed here so we cannot say anything about it. Adding cash to rebalance is then simply extra investment.