Optimal Rebalancing Strategy for a Balanced Fund

Medium Trading & Rebalancing Rebalancing Strategies

Sarah is a portfolio manager overseeing a balanced fund composed of 60% equities and 40% fixed income. The fund has a target allocation of 70% equities to 30% fixed income due to changing market conditions and bullish sentiment towards equities. Sarah conducts a review after periods of significant market movements to ensure the fund adheres to its target risk tolerance.

To realign the fund's asset allocation, Sarah contemplates various rebalancing strategies, including using threshold-based rebalancing and calendar rebalancing. As she evaluates these options, Sarah considers both the costs associated with trading and the overall efficiency of the strategies when adjusting the portfolio.

Which rebalancing strategy should Sarah implement to optimally align her fund with the target allocation while minimizing transaction costs?

Calendar rebalancing, which involves adjusting allocations on a fixed schedule, regardless of market movements.

Threshold-based rebalancing, which involves rebalancing only when asset allocations deviate by a predetermined percentage.

Dynamic rebalancing, which involves continuous adjustment of allocations based on market conditions.

Hint

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