Dynamic Rebalancing Strategy

Maria is a portfolio manager who follows a dynamic rebalancing strategy for a multi-asset class portfolio consisting of equities, bonds, and alternatives. The portfolio’s allocation is set at 60% equities, 30% bonds, and 10% alternatives, with a strict rebalancing band of 5%. After a significant market downturn, the new asset allocation is 50% equities, 40% bonds, and 10% alternatives. Maria is considering the optimal rebalancing strategy to bring the portfolio back to its target allocation.

Given her situation, Maria recalls three potential strategies: (1) rebalancing back to the target allocation immediately, (2) waiting for the portfolio to drift further before rebalancing, and (3) employing a tactical approach by analyzing market conditions and adjusting allocations based on broader economic indicators before rebalancing. Which of the following strategies should Maria employ to minimize transaction costs while adhering to her investment policy?