Reading 25: Asset Allocation－LOS d allocation, liability, management

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 7: Asset Allocation
Reading 25: Asset Allocation
LOS d: Contrast the asset-only and asset/liability management (ALM) approaches to asset allocation.

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Which one of the following most closely matches an advantage of the asset-liability approach over the asset only approach to strategic asset allocation?

A) Liabilities and assets are highly correlated.

B) Foreign exchange risk is minimized.

C) Asset classes have different systematic risk exposures.

D) Liability funding is more accurately controlled.

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Answer and Explanation

The asset-liability approach to strategic asset allocation is desirable because liabilities are more accurately controlled.

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Mark Zedon, a financial consultant prepares a strategic asset allocation for his client based on the clients risk/return preferences. This approach to strategic asset allocation is called the:

A) investment policy statement approach.

B) asset only approach.

C) static approach.

D) efficient frontier approach.

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Answer and Explanation

Because the consultant only takes into account the investors risk and return preferences, he is using the asset only approach to strategic asset allocation.

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The investment committee of a life insurance company recommends a strategic asset allocation for the company based on the projected policy premium inflows and payouts along with long-term capital market expectations. This approach to strategic asset allocation is known as the:

A) asset-liability approach.

B) investment policy statement approach.

C) static approach.

D) efficient frontier approach.

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Answer and Explanation

Because the committee takes into account the companys inflows and outflows (liabilities), the approach is called the asset-liability approach to strategic asset allocation.