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FIN5PMT

Faculty of Business, Economics and Law

FIN5PMT

Faculty of Business, Economics and Law

Key learning outcomes
• Summarize the function of strategic asset allocation in portfolio management

Topic 2 Asset Allocation
Presented by: Dr. Jing Zhao Department of Finance

• Di Discuss the role of strategic asset allocation in relation to h l f i ll i i l i exposures to systematic risk • Compare and contrast strategic and tactical asset allocation • Appraise the importance of asset allocation for portfolio performance

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FIN5PMT Portfolio Management, Dr. Robin Luo FIN5PMT Portfolio Management, Dr. Robin Luo

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FIN5PMT

Faculty of Business, Economics and Law

FIN5PMT

Faculty of Business, Economics and Law

Function of Strategic Asset Allocation in Portfolio Management
Strategic asset allocation
- integrates an investor’s return objectives, risk tolerance, and investment constraints with long-run capital market expectations to long run establish exposures to IPS-permissible asset classes. Purpose is to satisfy investor’s objectives and constraints. Process of strategic asset allocation leads to a set of portfolio weights for asset classes, called the policy portfolio.
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FIN5PMT Portfolio Management, Dr. Robin Luo

Function of Strategic Asset Allocation in Portfolio Management

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FIN5PMT Portfolio Management, Dr. Robin Luo

FIN5PMT

Faculty of Business, Economics and Law

FIN5PMT

Faculty of Business, Economics and Law

Strategic Asset Allocation and Systematic Risk
 In the long run, investors expect compensation for bearing risk they cannot diversify away. (non-diversifiable/systematic risk)  Distinct asset classes have distinct risk exposures to different factors.  A key economic role of strategic asset allocation: specifies the investor’s desired exposures to systematic risk.  Strategic asset allocation: indicates the appropriate asset mix to be g pp p held under long-term or “normal” conditions;
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