A retail client's portfolio has a strategic asset allocation target of 60% equities and 40% fixed income. After a strong equity market rally, the portfolio's actual allocation has shifted to 75% equities and 25% fixed income. The client's original risk tolerance for average volatility remains unchanged. Which of the following rebalancing triggers should the portfolio manager consider?

Question: A retail client's portfolio has a strategic asset allocation target of 60% equities and 40% fixed income. After a strong equity market rally, the portfolio's actual allocation has shifted to 75% equities and 25% fixed income. The client's original risk tolerance for average volatility remains unchanged. Which of the following rebalancing triggers should the portfolio manager consider?

Answer options:

• A calendar-based rebalancing trigger, such as annually or semi-annually.
• A volatility-based trigger, where rebalancing occurs only when the portfolio's standard deviation exceeds a certain threshold. ✅ A percentage-based corridor trigger, where rebalancing is initiated when an asset class deviates by more than a pre-defined percentage from its target.
• An absolute monetary value trigger, rebalancing only when the dollar value of the deviation exceeds $50,000.

Correct answer: A percentage-based corridor trigger, where rebalancing is initiated when an asset class deviates by more than a pre-defined percentage from its target.

Explanation: A percentage-based corridor trigger is highly suitable here, as it directly addresses deviations from the target allocation. Since the portfolio has significantly drifted (15% in equities), rebalancing back to the target allocation is necessary to manage the client's risk exposure and maintain the intended asset mix.