Which investment strategy involves the redistribution of assets to maintain a desired level of asset allocation?

The investment strategy that involves the redistribution of assets to maintain a desired level of asset allocation is rebalancing. This process is essential for ensuring that an investment portfolio remains aligned with the investor’s risk tolerance and investment goals over time.

When assets in a portfolio rise or fall in value, the proportional weight of each asset class can change significantly. For instance, if stocks perform well and increase in value, they may take up a larger portion of the portfolio compared to bonds or other assets. Rebalancing entails selling some of the overrepresented assets and potentially buying more of the underrepresented ones to return to the original target allocation.

This strategy is particularly important because it helps investors avoid unintended risk exposure that could occur due to fluctuations in market conditions. By regularly rebalancing, investors can also potentially enhance returns and reduce overall portfolio volatility.

In contrast, hedging aims to limit potential losses by taking an offsetting position in a related security, speculation involves making trades that anticipate future price changes for profit, and margin trading refers to borrowing funds to invest, which increases potential returns as well as risks. Each of these strategies serves different purposes and does not focus specifically on maintaining a targeted asset allocation like rebalancing does.