Portfolio Management and Wealth Planning【Reading 21】 techniques, investment, allocation

hinsafdar

Carl Allen and Cliff Hanes are analysts for Tacticon Advisory (Tacticon). Allen and Hanes have been assigned the task of documenting some of Tacticon’s asset allocation techniques. After receiving accolades in a recent trade magazine article featuring investment firms with innovative trading strategies, their supervisor, Amos Ridley, decides it is time the firm began formally documenting the firm’s proprietary asset allocation process.
Ridley wants Allen and Hanes to record the specifics of Tacticon’s investment process for internal use. He also wants them to compile a document explaining a variety of allocation techniques to be used by the marketing staff and portfolio managers when working with prospects and clients.
At their first meeting after receiving the assignment, a discussion of strategic and tactical allocation commences. Allen and Hanes feel confident about the distinction between the two, but are less certain about the differences between asset-liability management (ALM) versus asset-only approaches to asset allocation.
Hanes states “ALM and asset-only approaches are used for strategic asset allocation. With ALM an investor’s optimal asset allocation is directly related to explicit liability modeling. On the other hand, with asset-only strategies, liabilities only indirectly impact the return objective.”
Allen replies, “I’m not so sure. I thought that tactical, asset-only approaches like immunization and cash flow matching are more precise than ALM for controlling risk.”Strategic asset allocation:

A) establishes a portfolio’s long-term asset class exposures by integrating each element of investment policy with capital market expectations.

B) sets a portfolio’s asset class exposures to unsystematic risk.

C) involves short-term variations from an investor’s normal asset mix.

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Strategic asset allocation establishes a portfolio’s long-term asset class exposures by integrating each element of investment policy with capital market expectations. It affords an investor the ability to control systematic risk exposures by aligning their risk and return objectives with the actual portfolio of investments. Tactical asset allocation involves adjustments away from the strategic mix to take advantage of short-term projections of relative asset class performance.

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Concerning the discussion between Hanes and Allen about ALM versus asset-only allocation approaches:

A) both are correct.

B) both are incorrect.

C) only one is correct.

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ALM and asset-only approaches are used for strategic not tactical asset allocation. With ALM an investor’s optimal asset allocation is directly related to explicit liability modeling. With asset-only strategies, liabilities only indirectly impact the return objective. Asset-only approaches are less precise than ALM for controlling risk. Immunization and cash management are ALM approaches.

hinsafdar

Which of the following statements regarding the strategic asset allocation process is least accurate?

A) The strategic asset allocation must be rebalanced periodically for changes in the valuation of the various asset classes in the portfolio.

B) The strategic asset allocation review is typically performed once per year.

C) Strategic asset allocation, similar to tactical asset allocation, employs a short-run capital market projection.

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Strategic asset allocation employs a long-term capital market projection.

hinsafdar

Strategic asset allocation is based upon:

A) long-term capital market expectations and risk/return preferences of the investor.

B) short-term capital market expectations and the investment policy statement.

C) long-term capital market expectations and the investment policy statement.

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Strategic asset allocation is based on long-term capital market expectations (which forms the basis for the generation of the efficient frontier) and the investment policy statement (IPS) of the investor. The IPS includes not only the risk/return objectives of the investor but also the investor’s constraints.

hinsafdar

Assignment of asset class weights for a portfolio based on long-term capital market expectations is called:

A) strategic asset allocation.

B) portfolio optimization.

C) tactical asset allocation.

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Strategic asset allocation is the assignment of weights to different asset classes based on long-term capital market expectations. Tactical asset allocation is based on short-term capital market expectations.

hinsafdar

In a market that can be characterized by up-down or down-up movements, rather than a sustained up or down trend, which of the following statements is least accurate with regard to the benefits of rebalancing the asset mix of a portfolio?

A) Under a buy and hold strategy, asset allocation changes occur solely in response to changes in relative market values.

B) Disciplined rebalancing strategies are superior to a buy and hold strategy.

C) Momentum-based rebalancing strategies outperform disciplined rebalancing strategies.

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Disciplined rebalancing (e.g., maintaining a 60% stock / 40% bond mix) is superior to a momentum-based rebalancing strategy when the market is not following a sustained trend.

hinsafdar

Each of the following statements concerns either strategic asset allocation or tactical asset allocation. Which of the following statements is least accurate?

A) Strategic asset allocation is typically a constant mix strategy.

B) Strategic asset allocation employs a long-run view of capital market conditions.

C) Tactical asset allocation employs a long-run view of capital market conditions.

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Tactical asset allocation is an attempt to take advantage of temporary capital market inefficiencies and takes a short-run view of market conditions. Both of the other statements are true.

hinsafdar

Strategic asset allocation reflects what systematic risk exposure?

A) Investor’s desired systematic risk exposure.

B) Asset class systematic risk.

C) Long-term systematic risk exposure.

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Strategic asset allocation reflects the investor’s desired systematic risk exposure.

hinsafdar

What does Strategic Asset Allocation allow managers to do with respect to systematic risk?

A) Reduce.

B) Monitor and control.

C) Identify and minimize.

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Strategic asset allocation reflects the investor’s desired systematic risk exposure and allows the manager to monitor and control risk – not to reduce or minimize it.

hinsafdar

According to the modern portfolio theory, which risk is rewarded?

A) Systematic risk.

B) Total risk.

C) Efficient risk.

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According to modern portfolio theory, only systematic risk is rewarded. Total risk (may be measured by standard deviation) is comprised on systematic and unsystematic risk.

hinsafdar

Tactical asset allocation analysis:

A) assumes that investor's risk tolerance decreases with wealth.

B) is often based on deviant beliefs.

C) assumes lack of inefficiencies in the market.

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Tactical asset analysis often operates on the assumption that the market overreacts to information.
Tactical asset analysis is typically performed routinely as part of a continuing asset management, attempts to take advantage of perceived inefficiencies in the relative prices of securities in different asset classes, and assumes that investor’s risk tolerance is unaffected by changes in wealth.