In the Fall 1993 issue of VALIC Investment Digest, the Variable Annuity Life Insurance Company used pie

Question:

In the Fall 1993 issue of VALIC Investment Digest, the Variable Life Insurance Company used pie charts to help give the following description of an investment strategy called rebalancing:
Once you’ve established your ideal asset allocation mix, many experts recommend that you review your at least once a year to make sure your remains consistent with your preselected asset allocation mix. This practice is referred to as rebalancing.
For example, let’s assume a moderate asset allocation mix of 50 percent equities funds, 40 percent bond funds, and 10 percent cash- equivalent funds. The chart based on data provided by Ibbotson, a major investment and consulting firm, illustrates how rebalancing works. Using the Standard & Poor’s 500 Index, the Salomon Brothers Long- Term High- Grade Corporate Bond Index, and the U. S. 30- day Treasury bill average as a cash-equivalent rate, our hypothetical balance on 12/ 31/ 90 is $ 10,000. One year later the account had grown to $ 12,380. By the end of 1991, the allocation had changed to 52.7% 38.7% 8.5%. The third pie chart illustrates how the account was once again rebalanced to return to a 50% 40% 10% asset allocation mix.
Rebalancing has the potential for more than merely helping diversify your By continually returning to your original asset allocation, it is possible to avoid exposure to more risk than you previously decided you were willing to assume.
a. Suppose you control a $ 100,000 and have decided to maintain an asset allocation mix of 60 percent stock funds, 30 percent bond funds, and 10 percent government securities. Draw a pie chart illustrating your (like the ones in Figure 2.35).
b. Over the next year your stock funds earn a return of 30 percent, your bond funds earn a return of 15 percent, and your government securities earn a return of 6 percent. Calculate the end- of-year values of your stock funds, bond funds, and government securities. After calculating the end- of- year value of your entire determine the asset allocation mix (percent stock funds, percent bond funds, and percent government securities) of your before rebalancing. Finally, draw an end- of- year pie chart of your before rebalancing.
c. Rebalance your That is, determine how much of the portfolio’s end- of- year value must be invested in stock funds, bond funds, and government securities in order to restore your original asset allocation mix of 60 percent stock funds, 30 percent bond funds, and 10 percent government securities. Draw a pie chart of your after rebalancing.
Annuity
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