Behavioral Biases
Behavioral Biases Loss aversion refers to the irrational dislike of losses in a portfolio. It manifests when an investor, despite recognizing a stock’s positive metrics and including it in their portfolio, impulsively sells it when it faces a downturn. Goals-based…
Uses of Short-term Shifts in Asset Allocation
Strategic asset allocation (SAA) is the predetermined distribution of assets in a portfolio based on long-term goals and is established in an investment policy statement (IPS). On the other hand, tactical asset allocation (TAA) involves making short-term adjustments to the…
Revising Asset Allocation
Real-world asset allocations seldom remain static throughout the entire lifecycle of a portfolio. Analysts are advised to reassess asset allocation regularly. Analysts can run these reassessments at least annually and after significant events like market volatility or significant changes in…
Tax Considerations in Asset Allocation and Rebalancing
Commonalities Among Global Tax Codes As a global institution, CFA Institute® does not obligate candidates to study the tax codes of specific jurisdictions. However, certain commonalities in tax treatment are widely applicable and essential for the exam and the candidate’s…
Constraints on Asset Allocation
Real World Issues Real-world events often cause deviations from the optimal asset allocation the mathematical calculations of modern portfolio theory suggest. This section delves into the reasons behind these deviations and explores the timing and circumstances in which they occur….
Factors Affecting Rebalancing Policy
In rebalancing, securities within a portfolio are adjusted based on their relative weights. Disciplined rebalancing tends to reduce risk while incrementally adding to returns. Interpretations of this empirical finding include the following: Rebalancing earns a diversification return, in that rebalancing…
Heuristic and other Approaches to Asset Allocation
Heuristics, also known as rules of thumb, are simplistic and generic rules that investors use to satisfice. Satisficing, as covered in the behavioral economics section, reflects an attempt to reach a satisfactory economic decision at the expense of an optimal…
Goals-based Approach
A goals-based asset allocation process combines into an overall portfolio numerous sub-portfolios, each designed to fund a single goal within its time horizon and required probability of success. Individuals have unique needs that differ from those of institutions. The critical…
Liability-Relative Asset Allocation
Liability-relative approaches first view the cash flows of the sponsoring organization in question and then attempt to build a portfolio of securities that will satisfy these payments as they come due. This is in contrast to the popular asset-only approach…
Liability-Relative Asset Allocation
Liability-relative approaches first view the cash flows of the sponsoring organization in question and then attempt to build a portfolio of securities that will satisfy these payments as they come due. This is in contrast to the popular asset-only approach…
