NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesMedium
A client is interested in a strategy that involves continuously rebalancing their portfolio back to its original asset allocation percentages. This approach is based on the belief that asset classes will revert to their long-term average returns. What is this portfolio management strategy known as?
- AMarket timing
- BDynamic hedging
- CStrategic asset allocation
- DTactical asset allocation
Show answer & explanationAnswer & explanation
Correct answer: C. Strategic asset allocation
Strategic asset allocation involves establishing a target asset allocation and periodically rebalancing the portfolio to maintain those target percentages. This strategy assumes that asset classes will revert to their long-term mean returns, and it is a long-term approach that largely ignores short-term market fluctuations.
Why the other options are wrong
- A. Market timing involves predicting short-term market movements, which contradicts rebalancing to a fixed strategic allocation.
- B. Dynamic hedging is a risk management technique, often involving options or futures, not a core asset allocation strategy based on mean reversion.
- D. Tactical asset allocation involves short-term deviations from strategic allocation based on market outlook, not strict rebalancing to original targets.
Strategic Asset Allocation
A long-term portfolio management strategy that establishes target asset allocation percentages and periodically rebalances the portfolio to maintain those targets, often based on the belief in mean reversion.
- Long-term focus.
- Rebalances to original target percentages.
- Assumes mean reversion of asset class returns.
Memory trick: Strategic: Stick to your long-term plan, rebalance.