Canadian Securities Course (CSC) Level 2 Practice Exam

What is the key factor to consider in determining the need for rebalancing in tactical asset allocation?

1. Market liquidity

2. Government regulations

3. Industry trends

4. Investment opportunities

The correct answer is: Investment opportunities

Understanding the need for rebalancing in tactical asset allocation primarily revolves around the changing investment opportunities within different asset classes. Tactical asset allocation is a dynamic investment strategy that allows for shifts in asset weights in response to market conditions or perceived opportunities. When investment opportunities arise, whether due to a market correction, emerging sectors showing growth potential, or other shifts in economic indicators, it may prompt an investor to rebalance their portfolio in order to capitalize on these new opportunities. This approach aims to enhance returns by adjusting the allocation of assets in line with what is deemed more favorable at a given time. In contrast, while other factors such as market liquidity, government regulations, and industry trends can influence investment strategy, they do not directly drive the need for rebalancing in the same way that seizing new investment opportunities does. Tactical asset allocation is inherently about taking advantage of prevailing conditions, making the recognition of investment opportunities a key component of the rebalancing decision.