"Market Impact" of Calendar Rebalancing??

CFA Level III
#1

Kaplan Practice Exams, Volume 2, page 51,

Regarding comment 1, the answer key says:

“Comment 1 is correct. The success of a calendar rebalancing strategy will depend in large part on whether the rebalancing frequency is appropriate to the volatility of the component asset classes. If volatility is high (or rebalancing infrequent), the asset mix can drift to the point where rebalancing could create a market impact, thus increasing the cost of rebalancing dramatically. If volatility is low (or rebalancing too frequent), the portfolio could incur numerous costly small trades to achieve minor adjustments in the asset mix.”

What do they mean by “market impact” ?? How does 1 client portfolio, rebalancing annually, even if the allocation gets out of control, cause a “market impact” ??

CFA, volume 6, page 90, section 3.2.1 says the same thing but does not explain what they mean by “market impact”.

How are we supposed to interpret this?

#2

If you have a large portfolio and need to trade 10% of it to bring it back to balance, you could have a major influence on market prices. So it may be better to rebalance more often and smaller amounts instead of less frequently with higher amounts. However, should mainly be a topic for small-caps or other illiquid stuff.

#3

If rebalancing 20% of a portfolio is going to move that asset enough to create a “market impact” - the client shouldn’t even have that asset.

#4

Your client could be an institution