NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A client has a portfolio managed using a strategic asset allocation approach. Which of the following best describes the rebalancing frequency of this portfolio?
- AOnly when major economic crises occur.
- BDaily, based on intraday market movements.
- CQuarterly or semi-annually, based on market forecasts.
- DPeriodically, to return to the original target allocation.
Show answer & explanationAnswer & explanation
Correct answer: D. Periodically, to return to the original target allocation.
Strategic asset allocation involves setting a long-term target allocation and periodically rebalancing the portfolio to return to that target. This is done to maintain the desired risk/return profile, not based on frequent market forecasts or only during crises.
Why the other options are wrong
- A. Waiting for crises is reactive and does not maintain a consistent risk profile.
- B. Daily rebalancing is characteristic of active trading, not strategic asset allocation.
- C. Rebalancing based on market forecasts is typical of tactical asset allocation, not strategic.
Strategic Asset Allocation
A portfolio management strategy that involves setting long-term target asset allocation percentages based on the client's risk tolerance and investment objectives, and periodically rebalancing to maintain those targets.
- Long-term focus, typically 5+ years.
- Assumes market efficiency and does not attempt to time the market.
- Rebalancing is done to restore the original asset mix and risk profile.
Memory trick: Strategic sets the course, tactical adjusts the sails, dynamic dances with the whales.