Which outcome is expected from portfolio rebalancing in regard to high return securities?

Portfolio rebalancing is a strategy used by investors to maintain their desired asset allocation over time. This typically involves selling assets that have increased in value, and buying those that have decreased in value to bring the portfolio back to its intended allocation.

Choosing to decrease exposure to potentially over-priced securities aligns with the rebalancing strategy. When a security has appreciated significantly, it may be deemed over-priced relative to its underlying fundamentals, which increases the risk of a price correction. By selling parts of these high-return securities, the manager not only locks in gains but also reduces the portfolio's overall risk profile. This action helps in managing exposure to securities that may exhibit high volatility or unsustainable returns.

In contrast, increasing exposure to high-risk securities, maintaining stable exposure regardless of market changes, or seeking higher returns without any adjustments contradicts the objectives of prudent risk management and disciplined investing practices inherent in rebalancing. The emphasis is on adjusting the portfolio to reflect both the changing market conditions and the original investment strategy, rather than maintaining increased exposure to potentially volatile or inflated assets.