LOS o: Formulate and justify tactical asset allocation (TAA) adjustments to strategic asset-class weights, given a TAA strategy and expectational data.

Q1. Lynette Kelly is a principal with Beta Asset Advisors. Traditionally, the firm has always invested with an extremely long time horizon; however, Kelly’s outlook is for generally flat returns for the market over the next 5 to 7 years. In an effort to generate stronger returns for clients, Kelly believes the firm needs to make tactical allocation adjustments to client portfolios in order to achieve higher returns. Kelly is not very familiar with tactical asset allocation, so she asks Jacob Cannon, an analyst with the firm to prepare a report on tactical asset allocation. Cannon’s report contains the following points:

Point 1:       The most common way to implement tactical asset allocation is through a derivative overlay.        

Point 2:       Tactical asset allocation is only performed at the asset class level.

Point 3:       Tactical asset allocation can only be performed at regular intervals (i.e., monthly or quarterly).      

Point 4:       In order to effectively implement the tactical asset allocation changes, our firm should hire additional personnel so that there will be internal experts on staff.

After reading Cannon’s report, Kelly should agree with:

A)   Points 1 and 4 only.

B)   Point 1 only.

C)   all of the points in the report.

LOS o: Formulate and justify tactical asset allocation (TAA) adjustments to strategic asset-class weights, given a TAA strategy and expectational data. fficeffice" />

Q1. Lynette Kelly is a principal with Beta Asset Advisors. Traditionally, the firm has always invested with an extremely long time horizon; however, Kelly’s outlook is for generally flat returns for the market over the next 5 to 7 years. In an effort to generate stronger returns for clients, Kelly believes the firm needs to make tactical allocation adjustments to client portfolios in order to achieve higher returns. Kelly is not very familiar with tactical asset allocation, so she asks Jacob Cannon, an analyst with the firm to prepare a report on tactical asset allocation. Cannon’s report contains the following points:

Point 1:       The most common way to implement tactical asset allocation is through a derivative overlay.        

Point 2:       Tactical asset allocation is only performed at the asset class level.

Point 3:       Tactical asset allocation can only be performed at regular intervals (i.e., monthly or quarterly).      

Point 4:       In order to effectively implement the tactical asset allocation changes, our firm should hire additional personnel so that there will be internal experts on staff.

After reading Cannon’s report, Kelly should agree with:

A)   Points 1 and 4 only.

B)   Point 1 only.

C)   all of the points in the report.

Correct answer is B)

Point 1 is correct. Tactical asset allocation can be accomplished through trading assets or through a derivative overlay, but as a result of cost savings and saving time, a derivative overlay tends to be a more common approach. The other three points are incorrect. Tactical asset allocation can be performed at the asset class, sector, industry, or in some cases, asset level. Also, tactical asset allocation can be performed at regular intervals (part of a regular program) or sporadically as market conditions warrant. Because of the flexibility of tactical asset allocation, it could be performed by internal personnel or by outside firms that specialize in tactical allocation.