Strategic asset allocation
The long-term target weights for each asset class, derived from the investor's objectives and constraints. It explains most of the variation in a portfolio's returns over time.
Where you will meet it
Strategic asset allocation appears in 7 learning outcomes on the CFA syllabus. A few of them:
- Set out the stages of the process for managing a portfolio
“Planning establishes the investor's circumstances, writes the investment policy statement and sets the strategic asset allocation against capital market expectations.”
- Explain what capital market expectations contribute to managing a portfolio and set out a structured process for building them
“Forecasts of return, volatility and correlation for each asset class are the raw material of strategic asset allocation, so weak inputs produce a weak policy portfolio however good the optimiser.”
- Evaluate an institutional investor's investment policy statement
“An institutional IPS should define the mission and objectives, the return target and risk tolerance, the constraints (liquidity, horizon, legal and regulatory, tax, unique circumstances), the strategic asset allocation with ranges and benchmarks, rebalancing policy, governance responsibilities, and reporting and review procedures.”
- Separate the part of investment results due to the asset owner's decisions from the part due to the manager, and interpret each
“The asset owner, such as a sponsor's investment committee, sets the strategic asset allocation and chooses the benchmarks and managers; each manager answers only for performance against its mandate benchmark.”
Practise it
Practise strategic asset allocation until it is automatic: questions that explain every wrong option.
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