CFA Level II ExamPortfolio Management and Wealth PlanningMedium
A portfolio manager is constructing a global multi-asset portfolio for a high-net-worth client. The client has expressed a strong preference for maintaining a diversified exposure across different economic regions and asset classes, but also wants to ensure that the portfolio is resilient to unexpected systemic shocks. Which of the following approaches to asset allocation would be most suitable to address both the diversification requirement and the resilience to systemic shocks?
- ADynamic Asset Allocation (DAA)
- BTactical Asset Allocation (TAA)
- CStrategic Asset Allocation (SAA)
- DCore-Satellite Asset Allocation
Show answer & explanationAnswer & explanation
Correct answer: C. Strategic Asset Allocation (SAA)
Strategic Asset Allocation (SAA) involves setting long-term target asset class weights to achieve long-term objectives and risk tolerance, providing broad diversification and resilience to shocks by maintaining a stable, diversified structure. While other methods adjust over time, SAA forms the fundamental diversified backbone.
Why the other options are wrong
- A. DAA involves continuous adjustments based on market conditions, which can be reactive but doesn't inherently establish the long-term diversified structure as SAA does.
- B. TAA involves short-term adjustments to exploit perceived market inefficiencies, which isn't the primary method for long-term diversification and resilience.
- D. Core-Satellite is a portfolio construction approach, not a primary asset allocation strategy for establishing the overall long-term diversified structure itself.
Strategic Asset Allocation (SAA)
A long-term asset allocation approach that sets target weights for various asset classes based on the investor's long-term objectives, risk tolerance, and investment horizon.
- Focuses on long-term goals and risk-return characteristics.
- Provides broad diversification across asset classes and regions.
- Generally involves periodic rebalancing back to target weights.
Memory trick: Asset Allocation: How to Slice the Investment Pie.