NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesHard
A portfolio manager believes that the market is currently overvalued and anticipates a significant downturn in the near future. To capitalize on this belief and potentially profit from a market decline, the manager decides to temporarily increase the portfolio's allocation to cash and short-selling opportunities, while reducing exposure to equities. This approach is an example of:
- AStrategic asset allocation
- BPassive portfolio management
- CLong-term growth investing
- DTactical asset allocation
Show answer & explanationAnswer & explanation
Correct answer: D. Tactical asset allocation
Tactical asset allocation involves actively adjusting a portfolio's asset mix away from its long-term strategic targets based on short-term market forecasts or economic outlooks, aiming to capitalize on perceived market inefficiencies or avoid downturns.
Why the other options are wrong
- A. Strategic asset allocation involves setting long-term target allocations and rebalancing periodically, without making frequent changes based on market forecasts.
- B. Passive portfolio management aims to replicate a market index, making no active decisions about market timing or asset selection.
- C. Long-term growth investing focuses on individual securities with growth potential over extended periods, not on broad market timing decisions.
Tactical Asset Allocation
An active portfolio management strategy that involves making short-term adjustments to a portfolio's asset mix away from its long-term strategic targets, based on market forecasts and economic outlooks.
- Attempts to 'time the market'.
- Short-term focus (weeks, months, quarters).
- Deviates from long-term target allocations.
- Aims to exploit perceived market inefficiencies or avoid downturns.
Memory trick: Strategic is long, tactical is quick and strong, adjusting the sails when the market goes wrong.