hinsafdar

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 investor’s risk tolerance is constant and his capital market expectations are subject to frequent change.

B) 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.

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

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The most appropriate asset allocation strategy is the tactical strategy. This strategy assumes that the investor’s 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 investor’s 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 investor’s risk tolerance will not change and would continue to allocate consistent amounts to stocks and cash or bonds.

hinsafdar

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

A) strategic asset allocation.

B) targeted asset allocation.

C) tactical asset allocation.

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

hinsafdar

Strategic asset allocation analysis:

A) often results in a buy and hold strategy.

B) often results in constant mix strategies.

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

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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.

hinsafdar

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

A) Tactical allocation is a contrarian investment strategy.

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

C) Strategic asset allocation is a drifting mix strategy.

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

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.

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

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

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

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

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.