asset allocation heuristics, anyone? allocation, philosophy, recently, practice, involved

Viceroy

I find it frustrating when questions about institutional or private asset allocation boil down to differences of opinion/philosophy. I just took a Schweser practice quiz, and the vignette involved an endowment which was funding medical centers, and had most recently expanded to funding new medical centers in Germany and Singapore, so the spending rate was up from 3.5% to 5.2%.

The vignette showed an asset allocation with 65% equities, split 60 (US) to 5 (Intl.). The question asked:

Which of the following most appropriately addresses the Fund’s allocation to U.S. equities? The fund’s allocation to U.S. equities is:

A) appropriate.
B) too high. A 50-55% allocation to U.S. equities is more appropriate.
C) too high. A 35-40% allocation to U.S. equities is more appropriate.

65% to equities seemed roughly correct, but I tend to divide them roughly evenly between US and the rest of the world, for two reasons:

1. US is 30% of world market cap, so a 50/50 split would still be overweighting the US on a cap weighted basis.
2. The Fund has significant exposures to EUR and SGD with the new medical centers, which leans me in favor of more international securities.

You know where I'm going with this. I picked C. Schweser's answer was B. And the answer even agreed with the 65% to equities being correct! It was only suggesting a 5-10% shift towards international, whereas I was happy to shift up to 25% (for reasons I mentioned above).

I suppose with an essay question I can justify my decision, but with a multiple choice question I'm either right or wrong.

I see a little bit of "home bias" in both CFAI and Schweser allocations--is there some summary of asset allocation heuristics to use for the test that I can study for and then discard after June when I return to the real world of investing people's money?

Windjammer

Revisor is right. There will be questions that suck rocks. Including on the actual test. Do your best and move on. 90% of the questions are fair so don't let one or two put up a roadblock.

mp3bu

at least 50% of schweser's Vignette aka "advanced" questions in Qbank are like this - they are a complete waste of time, don't think the exam will be like this.

Funny you bring it up, i was on the exact same question this week and was basically cursing at my screen when i finished it.

justin88

I do agree.