Reading 26: Asset Allocation LOS b～ Q1-6 investor, contrast, strategic, allocation, interested

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LOS b: Compare and contrast strategic and tactical asset allocation.

Q1. 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.

 

Q2. 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.

 

Q3. Tactical asset allocation is a deviation from the strategic asset allocation for the purpose of:

A)   aligning with investor’s risk preferences.

B)   exceeding investor’s return objectives.

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

 

Q4. Strategic asset allocation analysis:

A)   often results in constant mix strategies.

B)   often results in a buy and hold strategy.

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

 

Q5. Which of the following statements regarding asset allocation strategies is FALSE?

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.

 

Q6. Tactical asset allocation analysis:

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

B)   assumes lack of inefficiencies in the market.

C)   is often based on deviant beliefs.

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