How does rebalancing help in portfolio management?

Rebalancing is a crucial strategy in portfolio management because it helps adjust the weightings of different assets in a portfolio to maintain a desired risk level. Over time, due to market fluctuations, certain investments may grow or shrink disproportionately within the portfolio, leading to a risk profile that is different from what was originally intended. By rebalancing, an investor can realign the portfolio back to its target allocation, ensuring that it aligns with their risk tolerance and investment objectives.

For example, if a portfolio was originally allocated 60% to equities and 40% to bonds, but due to a strong performance in equities, the allocation shifts to 70% equities and 30% bonds, rebalancing would involve selling a portion of equities and buying bonds to restore the original 60/40 ratio. This not only helps in managing risk but also encourages buying low and selling high, as investors are taking some profits when an asset class has increased in value.

The other options suggest outcomes that aren't achievable through rebalancing. There is no guarantee of profit or prevention of loss solely through rebalancing, nor does it involve liquidating assets entirely, which would defeat the purpose of a balanced portfolio strategy. Instead, rebalancing focuses on maintaining the