Level 1 — RecognitionAsset Allocation & Rebalancing

Asset Allocation & Rebalancing

⏱ 20 minutes30 marksprintable — key stays hidden on paper

Chapter: 5.6 Asset Allocation & Rebalancing Level: 1 — Recognition (MCQ + Matching + True/False with justification) Time Limit: 20 minutes Total Marks: 30

Section A — Multiple Choice (1 mark each, 10 marks)

Choose the single best answer.

Q1. Strategic asset allocation is best described as: a) Frequently shifting weights to exploit short-term market views b) Setting long-term target weights based on goals and risk tolerance c) Holding only equities for maximum growth d) Avoiding rebalancing entirely

Q2. Tactical asset allocation differs from strategic allocation because it: a) Never changes the portfolio b) Makes short-term deviations from targets to capture opportunities c) Ignores risk tolerance d) Is used only by index funds

Q3. A common age-based rule for equity allocation is: a) $100 + \text{age}$ % in equity b) $(100 - \text{age})$ % in equity c) $\text{age} \times 2$ % in equity d) Always 50% in equity regardless of age

Q4. In a core-satellite portfolio, the "core" typically consists of: a) High-risk speculative bets b) Low-cost, broadly diversified index holdings c) A single stock d) Cash only

Q5. Calendar rebalancing means: a) Rebalancing whenever an asset drifts beyond a set percentage b) Rebalancing at fixed time intervals (e.g., annually) c) Never rebalancing d) Rebalancing only after a market crash

Q6. Threshold (tolerance-band) rebalancing is triggered by: a) A fixed date each year b) An asset class deviating beyond a preset percentage from target c) A change in the investor's age d) Dividend payments

Q7. Rupee cost averaging involves: a) Investing a fixed rupee amount at regular intervals b) Buying more only when prices peak c) Selling all holdings monthly d) Investing a variable amount based on mood

Q8. Portfolio drift refers to: a) The advisor changing firms b) Asset weights moving away from targets due to differing returns c) A fund closing down d) Inflation eroding cash

Q9. Goal-based investing organizes portfolios primarily around: a) The advisor's commission b) Specific financial objectives with time horizons c) Random selection of stocks d) Copying a friend's portfolio

Q10. A tax-efficient allocation strategy would place tax-inefficient assets in: a) A regular taxable account b) A tax-advantaged/tax-deferred account c) Under a mattress d) Only in equities

Section B — Matching (1 mark each, 6 marks)

Q11–Q16. Match each term in Column X with its correct description in Column Y.

Column X	Column Y
Q11. Strategic allocation	A. Short-term deviation to exploit market views
Q12. Tactical allocation	B. Selling winners/buying losers back to target
Q13. Rebalancing	C. Long-term target weights from risk profile
Q14. Core-satellite	D. Index core plus active satellite positions
Q15. Threshold rebalancing	E. Fixed-interval portfolio adjustment
Q16. Calendar rebalancing	F. Triggered by drift past a tolerance band

Section C — True/False with Justification (2 marks each, 14 marks)

State True or False (1 mark) and give a one-line justification (1 mark).

Q17. Rebalancing enforces a "buy low, sell high" discipline.

Q18. A younger investor is generally advised to hold a higher bond allocation than an older investor.

Q19. Tactical asset allocation aims to keep weights permanently fixed.

Q20. Rupee cost averaging buys more units when prices are low and fewer when prices are high.

Q21. Threshold rebalancing may trigger trades more frequently in volatile markets than calendar rebalancing.

Q22. Placing high-yield bonds in a taxable account rather than a tax-deferred account is the most tax-efficient choice.

Q23. Portfolio drift, if ignored, can cause the actual risk level to differ from the intended risk level.

Answer keyMark scheme & solutions

Section A — MCQ (1 mark each)

Q1. b — Strategic allocation sets long-term target weights based on goals/risk tolerance; it is the anchor policy mix. (1)

Q2. b — Tactical allocation makes deliberate short-term deviations from strategic targets to exploit opportunities. (1)

Q3. b — The classic rule of thumb is $(100 - \text{age})\%$ in equities, reducing equity exposure as age rises. (1)

Q4. b — The core is typically low-cost, broadly diversified (often index) holdings; satellites are active/specialized bets. (1)

Q5. b — Calendar rebalancing occurs at fixed time intervals regardless of drift. (1)

Q6. b — Threshold rebalancing triggers when an asset deviates beyond a preset tolerance band. (1)

Q7. a — Rupee cost averaging invests a fixed amount at regular intervals. (1)

Q8. b — Drift is the movement of weights away from targets because assets earn different returns. (1)

Q9. b — Goal-based investing structures portfolios around specific goals and their time horizons. (1)

Q10. b — Tax-inefficient assets (e.g., taxable-interest bonds) are best held in tax-advantaged/deferred accounts. (1)

Section B — Matching (1 mark each)

Q	Answer
Q11	C
Q12	A
Q13	B
Q14	D
Q15	F
Q16	E

Award 1 mark per correct pair. Total 6.

Section C — True/False with Justification (1 + 1 each)

Q17. True. Rebalancing trims outperformers (sell high) and tops up underperformers (buy low) to restore targets. (1+1)

Q18. False. A younger investor generally holds MORE equity (less bonds) due to a longer horizon and greater risk capacity. (1+1)

Q19. False. Tactical allocation deliberately changes weights temporarily; it is strategic allocation that keeps a fixed long-term mix. (1+1)

Q20. True. With a fixed rupee amount, lower prices buy more units and higher prices buy fewer, lowering average cost. (1+1)

Q21. True. In volatile markets, prices cross tolerance bands more often, triggering more frequent threshold trades than fixed-date calendar rebalancing. (1+1)

Q22. False. High-yield bonds generate taxable interest and are more tax-efficient held in a tax-deferred account, not a taxable one. (1+1)

Q23. True. Uncorrected drift lets the risky asset weight grow beyond target, raising portfolio risk above the intended level. (1+1)

Worked illustration for Q20 (rupee cost averaging)

Invest ₹6000 fixed each month over 3 months at prices ₹10, ₹15, ₹12 per unit.

Month 1: $6000/10 = 600$ units
Month 2: $6000/15 = 400$ units
Month 3: $6000/12 = 500$ units
Total units $= 1500$ , total invested $= 18000$
Average cost per unit $= 18000/1500 = ₹12.00$
Simple average of prices $= (10+15+12)/3 = ₹12.33$

Average cost (₹12.00) < simple average price (₹12.33), confirming the benefit of buying more when cheap. (illustrative)

Worked illustration for Q3 (age rule)

For a 30-year-old: equity $= 100 - 30 = 70\%$ ; bonds $= 30\%$ . For a 60-year-old: equity $= 100 - 60 = 40\%$ — clearly less equity as age rises, supporting Q18.

[
  {"claim":"Age rule: 30-year-old gets 70% equity", "code":"age=30; equity=100-age; result = (equity==70)"},
  {"claim":"Age rule: older (60) has less equity than younger (30)", "code":"e30=100-30; e60=100-60; result = (e60 < e30)"},
  {"claim":"Rupee cost averaging: avg cost 12.00 < simple avg price 12.33", "code":"units=Rational(6000,10)+Rational(6000,15)+Rational(6000,12); avg_cost=Rational(18000)/units; simple=Rational(10+15+12,3); result = bool(avg_cost < simple)"},
  {"claim":"Rupee cost averaging total units equal 1500", "code":"units=Rational(6000,10)+Rational(6000,15)+Rational(6000,12); result = (units==1500)"}
]