What does it mean to "rebalance" a portfolio?

Rebalancing a portfolio refers to the process of adjusting the weightings of different assets within that portfolio to maintain a desired level of asset allocation. Over time, due to market fluctuations, the values of certain assets will increase or decrease, causing the original allocation percentages to shift. By rebalancing, an investor can bring the portfolio back in line with their investment goals and risk tolerance.

This adjustment helps in managing risk and ensuring that the portfolio remains diversified according to the investor's strategy. For instance, if a portfolio originally consisted of 60% stocks and 40% bonds, significant gains in the stock portion might push it to 70% stocks. Rebalancing would involve selling some stocks and buying bonds to return to the original 60/40 split.

The other options do not correctly capture the definition of rebalancing. Creating a new investment strategy is about formulating future investment plans rather than adjusting current asset allocations. Eliminating underperforming stocks could be part of an investment strategy but isn't the essence of rebalancing, which is more about maintaining overall asset distribution. Buying only high-risk assets pertains to a specific investment approach rather than the concept of rebalancing, which aims for a balanced risk profile.