Reading 25: Asset Allocation－LOS b contrast, strategic, allocation

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 7: Asset Allocation
Reading 25: Asset Allocation
LOS b: Compare and contrast strategic and tactical asset allocation.

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Tactical asset allocation is a deviation from the strategic asset allocation for the purpose of:

A) aligning with investors risk preferences.

B) exceeding investors return objectives.

C) taking advantage of short-term capital market expectations.

D) fulfilling crossing opportunities.

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Answer and Explanation

Tactical asset allocation deviates from Strategic asset allocation to take advantage of short-term capital market expectations.

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Deviation from the policy portfolio due to short-term capital market expectations is called:

A) strategic asset allocation.

B) capital market induced deviation.

C) tactical asset allocation.

D) targeted asset allocation.

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Answer and Explanation

Tactical asset allocation is the deviation from the policy portfolio (Strategic asset allocation) based on short-term capital market expectations.

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Which of the following statements regarding asset allocation strategies is FALSE?

A) In order to effectively implement a strategic asset allocation strategy, the investor's risk tolerance must remain constant.

B) The inputs to strategic asset allocation include long-run capital market expectations, risk and return objectives, and constraints.

C) Strategic asset allocation is a drifting mix strategy.

D) Tactical allocation is a contrarian investment strategy.

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Answer and Explanation

Strategic asset allocation is a constant-mix strategy. It requires that a portfolio is rebalanced in order to maintain a prescribed allocation.

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Bruce Calloway is interested in utilizing an appropriate asset allocation strategy for his portfolio. His long-term view of the capital market conditions is that there will always be change and opportunities to capture excess returns in the market. As a risk neutral investor, he is a consistent risk taker and his risk tolerance on his portfolio can be expected to be constant based on such market expectations. Which asset allocation strategy is the most appropriate strategy for his portfolio?

A) The tactical asset allocation strategy is most appropriate since this strategy assumes the investors risk tolerance is constant and his capital market expectations are subject to frequent change.

B) The mean variance approach asset allocation strategy best reflects Calloways view of market conditions since as market conditions change this strategy allows the asset allocation mix to change appropriately.

C) The strategic asset allocation strategy is most appropriate since this strategy allows the portfolio to be periodically rebalanced according to market conditions.

D) The dynamic strategic asset allocation strategy is most appropriate since this allows the capability to quickly move in and out of different assets as market conditions change.

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Answer and Explanation

The most appropriate asset allocation strategy is the tactical strategy. This strategy assumes that the investors risk tolerance is constant and his capital market expectations are subject to frequent change. The tactical strategy assumes that investment allocation decisions are based on current market conditions, but the risk tolerances do not change with changes in wealth levels. For example, when the market conditions are bearish, the investors view of risk does not change with respect to capital commitments to stocks and will allocate a consistent level of his portfolio to cash or bonds. In bull market or when markets rally, the investors risk tolerance will not change and would continue to allocate consistent amounts to stocks and cash or bonds.

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Tactical asset allocation analysis:

A) is often based on deviant beliefs.

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

C) is typically performed once in three years.

D) assumes lack of inefficiencies in the market.

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Answer and Explanation

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 investors risk tolerance is unaffected by changes in wealth.

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 investors risk tolerance is unaffected by changes in wealth.

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 investors risk tolerance is unaffected by changes in wealth.

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 investors risk tolerance is unaffected by changes in wealth.

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Strategic asset allocation analysis:

A) is usually done more frequently than tactical asset allocation.

B) often results in a buy and hold strategy.

C) often results in constant mix strategies.

D) is based on short-term capital market conditions.

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Answer and Explanation

This is often expressed as a percentage of total value invested in each asset class.

Strategic asset allocation analysis is usually done whenever the investor's circumstances change significantly and is often done as frequently as yearly. It is based on long-run capital market conditions, and requires transactions to rebalance the mix periodically.

Strategic asset allocation analysis is usually done whenever the investor's circumstances change significantly and is often done as frequently as yearly. It is based on long-run capital market conditions, and requires transactions to rebalance the mix periodically.

This is often expressed as a percentage of total value invested in each asset class.

Strategic asset allocation analysis is usually done whenever the investor's circumstances change significantly and is often done as frequently as yearly. It is based on long-run capital market conditions, and requires transactions to rebalance the mix periodically.

Strategic asset allocation analysis is usually done whenever the investor's circumstances change significantly and is often done as frequently as yearly. It is based on long-run capital market conditions, and requires transactions to rebalance the mix periodically.