Optimal Rebalancing Strategy and Transaction Costs

As a portfolio manager at a mid-sized asset management firm, you have decided to rebalance your equity portfolio, which has deviated from its target allocations due to market movements. The current allocation is 70% equities and 30% fixed income, while the target allocation is 60% equities and 40% fixed income.

When considering the rebalancing process, you need to evaluate the transaction costs associated with selling equities and buying fixed income. You understand that trading costs can significantly impact the overall returns of the portfolio. After reviewing different execution strategies, you notice the following:

1. A market order incurs a commission cost of 0.15% and a spread cost due to market conditions of 0.05%.

2. A limit order has a commission cost of 0.10%, but a higher opportunity cost which could result in additional unwarranted delay in executing the trades.

3. An algorithmic trading strategy estimates a total transaction cost of 0.25% but allows for optimal execution over time.

Given these parameters, if your objective is to minimize transaction costs while efficiently rebalancing to the target allocations, which option should you choose?