Which statement best contrasts calendar-based rebalancing with threshold-based rebalancing?

• A. Calendar-based rebalancing is predictable and simple; threshold-based rebalancing saves costs but is more complex; tax considerations and transaction costs matter.
• B. Threshold-based rebalancing is always cheaper than calendar-based.
• C. Rebalancing should be done only when new money is invested.
• D. Rebalancing is optional and never influenced by taxes.

Answer: (A)

Rebalancing strategies are about when you trade to restore a target asset mix. Calendar-based rebalancing follows a fixed schedule, which makes the process predictable and easy to manage. Threshold-based rebalancing triggers trades only when the portfolio drifts beyond a specified tolerance, which can reduce unnecessary trades and save costs, but it requires more monitoring and a more complex rule set. Tax implications and transaction costs influence both approaches; these costs matter most with threshold-based strategies because you can avoid or incur taxes and fees based on how often you rebalance. This contrast is best captured by noting that calendar-based is predictable and simple, while threshold-based can save costs but is more complex, with taxes and transaction costs shaping the decision.