Strategic Asset Allocation

Lesson

Strategic asset allocation is a portfolio management strategy that involves setting target allocations for various asset classes and periodically rebalancing the portfolio to maintain these allocations. This approach balances risk and reward by considering the investor's risk tolerance, investment time horizon, and financial goals. It is based on the belief that a well-diversified portfolio can provide the best risk-adjusted returns over the long term.

Practice Question #1

What is the primary goal of strategic asset allocation?

A) Outperforming a benchmark index

B) Balancing risk and reward in a portfolio

C) Predicting future market movements

D) Shifting investments between sectors

Select an option above to see an explanation here.

A) Outperforming a benchmark index is a goal of active management. B) Strategic asset allocation balances risk and reward by diversifying investments across various asset classes. C) Predicting future market movements is a goal of market timing. D) Shifting investments between sectors is a goal of sector rotation.

Terms

Strategic asset allocation:: A long-term investment strategy that involves setting target allocations for various asset classes and periodically rebalancing the portfolio to maintain these allocations.
Rebalancing:: The process of adjusting the weights of assets in a portfolio to maintain the desired asset allocation.
Target allocation:: The desired percentage of a portfolio to be invested in a particular asset class.

Practice Question #2

Which factor is most important when determining an investor's strategic asset allocation?

A) Market conditions

B) Risk tolerance

C) Sector performance

D) Economic trends

Select an option above to see an explanation here.

A) Market conditions are more relevant for tactical asset allocation. B) An investor's risk tolerance is a critical factor in determining their strategic asset allocation, as it helps to balance risk and reward in the portfolio. C) Sector performance is more relevant for sector rotation strategies. D) Economic trends are more relevant for tactical asset allocation.

Do Not Confuse With

Tactical asset allocation:: A short-term investment strategy that adjusts asset allocations based on market conditions or economic trends.
Market timing:: An investment strategy that attempts to buy and sell securities based on predictions of future market movements.

Practice Question #3

What is the process of adjusting the weights of assets in a portfolio to maintain the desired asset allocation called?

A) Diversification

B) Rebalancing

C) Sector rotation

D) Market timing

Select an option above to see an explanation here.

A) Diversification is spreading investments across various asset classes to reduce risk. B) Rebalancing is the process of adjusting the weights of assets in a portfolio to maintain the desired asset allocation. C) Sector rotation is a strategy that involves shifting investments between sectors of the economy based on their expected performance. D) Market timing is an investment strategy that attempts to buy and sell securities based on predictions of future market movements.

Real-World Example

An investor with a moderate risk tolerance and a 20-year investment time horizon might create a strategic asset allocation of 60% stocks, 30% bonds, and 10% cash. Over time, as market conditions change, the investor would periodically rebalance their portfolio to maintain these target allocations, selling assets that have increased in value and buying assets that have decreased in value.