NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A portfolio manager believes that the market is currently overvalued and anticipates a significant correction in the near future. To protect a client's diversified equity portfolio, the manager decides to temporarily increase the cash allocation from 5% to 20% and reduce equity exposure. This action is an example of which portfolio management strategy?
- AModern portfolio theory.
- BTactical asset allocation.
- CPassive portfolio management.
- DStrategic asset allocation.
Show answer & explanationAnswer & explanation
Correct answer: B. Tactical asset allocation.
Tactical asset allocation involves making short-term adjustments to a portfolio's asset mix based on market forecasts or economic outlook. The manager is temporarily altering the allocation based on an anticipated market correction, which is characteristic of a tactical approach.
Why the other options are wrong
- A. Modern portfolio theory is a framework for constructing portfolios to optimize risk and return, but is not a specific strategy for market timing.
- C. Passive management typically involves replicating an index and does not involve active market timing decisions.
- D. Strategic asset allocation maintains a long-term target allocation and rebalances periodically, not based on short-term market calls.
Tactical Asset Allocation
An active portfolio management strategy that involves making short-term adjustments to the strategic asset allocation based on market forecasts or perceived opportunities/risks.
- Attempts to 'time the market' to some extent.
- Deviates from long-term target allocations temporarily.
- Requires market analysis and judgment.
Memory trick: Strategic is the map, tactical is the weather; dynamic is the chase.