You have one million dollars in your investment account and choose to keep your money allocated...

You have one million dollars in your investment account and choose to keep your money allocated in the following proportion and rebalance each quarter: i. 60% in stocks via ETF SPY; ii. 40% in bonds via ETF AGG. Over the past quarter, AGG went up by 3% and SPY went up by 1%. a. What is your account balance before rebalancing? b. How do you rebalance your account? What to buy and what to sell? How many dollars to buy and how many dollars to sell?

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Expert Solution

As per the details in question, the total investment in the account is 1 Million dollars or 1000000 Dollars

The investment allocation ratio between ETF SPY Stocks and ETF AGG Bonds is 60% : 40% or 6:4 or 3:2

Amount Invested in SPY Stocks is 60% of 1 Million i.e. 600000

Amount invested in AGG Bonds is 40% of 1 Million i.e. 400000

Answer A

Past year AGG Bond up by 3% so current value is 400000 + (3% of 400000)

= 400000 + 12000

= 412000

Similarly current value of SPY Stocks is 600000 + (1% of 600000)

=600000 + 6000

= 606000

So account value before rebalancing = Current value of Bonds + Current value of Stocks

=412000+606000

=1018000

Answer B

To rebalance, we have to again bring the ratio between stocks and bonds at 3 : 2, this we can do by dividing total current value in the ratio of 3 : 2

Current value of Stocks 606000

Current value of Bonds 412000

To rebalance we have to sell the bonds worth 4800 Dollars and need to buy Stocks worth 4800 so the ratio will be again 3 : 2

606000+4800 : 412000-4800

610800 : 407200

3 : 2

jeff jeffy answered 1 year ago

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