Advanced Portfolio Monitoring and Rebalancing Strategy

As a CFA charterholder, you have been tasked with advising a high-net-worth client who has a diversified investment portfolio consisting of equities, fixed income, and alternative investments. The client has expressed concern about the significant market volatility experienced over the past six months, which has caused deviations from the target asset allocation. The client’s investment policy statement (IPS) defines the target allocation as 60% equities, 30% fixed income, and 10% alternatives. As of the latest assessment, the portfolio has shifted to 70% equities, 25% fixed income, and 5% alternatives due to fluctuating market conditions.

1. Discuss the importance of portfolio monitoring in the context of this client's investment strategy, particularly focusing on the implications of the current asset allocation deviations.

2. Describe the rebalancing strategies you would recommend to align the portfolio back to the target allocation, including considerations of transaction costs and tax implications.

3. Explain how you would communicate the rebalancing strategy and its rationale to the client while addressing the concerns regarding market volatility.