A portfolio manager is overseeing a balanced portfolio for a retired client, aiming for an initial 60% equity and 40% fixed income allocation. The client has indicated a need for regular withdrawals from the portfolio to cover living expenses. Which rebalancing strategy would be most efficient in managing portfolio drift while accommodating these periodic cash outflows?

Question: A portfolio manager is overseeing a balanced portfolio for a retired client, aiming for an initial 60% equity and 40% fixed income allocation. The client has indicated a need for regular withdrawals from the portfolio to cover living expenses. Which rebalancing strategy would be most efficient in managing portfolio drift while accommodating these periodic cash outflows?

Answer options: ✅ Cash Flow Rebalancing

• Calendar Rebalancing
• Threshold Rebalancing
• Constant Proportion Portfolio Insurance (CPPI)

Correct answer: Cash Flow Rebalancing

Explanation: Cash Flow Rebalancing uses incoming or outgoing cash flows to realign the portfolio to its target weights without needing to sell existing assets, which can be tax-efficient and reduce transaction costs, especially beneficial for a client with regular withdrawals.