- CFA Exams
- 2024 Level II
- Topic 9. Portfolio Management
- Learning Module 64. Basics of Portfolio Planning and Construction
- Subject 4. Portfolio Construction
Subject 4. Portfolio Construction PDF Download
An asset class is a group of securities that exhibit similar characteristics and behave similarly in the marketplace (risk-return relationship). Examples of asset classes are money market funds, fixed-income (bonds), equities (stocks), real estate, natural resources, precious metals, collectibles and insurance products. We can even further break down equity investments into additional sub-classes, such as large-cap, mid-cap and small-cap equities.
Asset classes are the building blocks of asset allocation, which is the process of choosing among various kinds of possible asset classes. Empirical studies have shown that 85-95% of a portfolio's total returns come from the asset allocation policy decision, not the selection of specific stocks and bonds. Asset allocation determines what percentage of your total portfolio you devote to the numerous asset classes available.
A strategic asset allocation (SAA) involves an examination of capital markets, to gauge future investment returns, combined with an understanding of portfolio objectives, risk tolerance, and constraints, to distribute a portfolio's assets effectively and efficiently among several asset classes in order to achieve the best return possible within acceptable risk levels.
- Selecting benchmarks that reflect the expected performance of each asset class.
Steps toward an Actual Portfolio
Risk budgeting is a process by which investment managers determine how much risks should be taken and how risk can be most effectively allocated across different asset classes.
In addition to taking systematic risks, an investment committee may choose to take tactical asset allocation risks or security selection risks. The amount of return attributable to these decisions can be measured.
As time goes on, a client's asset allocation will drift from the target allocation; the amount of allowable drift as well as a rebalancing policy should be formalized.
User Contributed Comments 2
|farhan92||so according the standards would tactical asset allocation be considered a violation?|
|Teeto||I think as long as the client is aware of and accepts it, it is not a violation. The nature and amount of deviation should be pre-agreed witin the IPS.|
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