What does 'rebalancing' an investment portfolio involve?

• A. Adjusting the proportions of different assets in a portfolio
• B. Investing in high-risk assets only
• C. Buying only stocks during market highs
• D. Divesting from all assets periodically

Answer: (A)

Rebalancing an investment portfolio involves adjusting the proportions of different assets to maintain a desired level of risk and asset allocation. Over time, due to market fluctuations, certain assets may increase or decrease in value, leading to a drift from the original investment strategy. By rebalancing, an investor can restore the original asset allocation, selling some assets that may have grown and buying others that have decreased, ensuring the portfolio aligns with the investor’s risk tolerance and investment goals.

This practice is essential because it helps to manage risk and can improve the potential for return by maintaining a diversified portfolio. It ensures that the portfolio remains aligned with the investor's long-term objectives rather than being influenced by short-term market movements.