Strategic Asset Allocation

C is correct. Jennifer has a 30-year time horizon until retirement, high income stability, high risk tolerance for volatility, and adequate emergency reserves. An 80% stock allocation maximizes long-term growth potential appropriate for her aggressive risk profile and long time horizon, while maintaining 15% bonds for diversification benefits and 5% cash for liquidity and rebalancing opportunities. This strategic allocation aligns with her stated objectives and constraints.

A is too conservative for her profile. a 40% stock allocation would be more appropriate for someone within 10 years of retirement or with low risk tolerance, not a 32-year-old with 30 years until retirement and high risk tolerance. B is moderately conservative and more suitable for investors 15-20 years from retirement or with moderate (not high) risk tolerance. D (100% stocks) eliminates diversification benefits and rebalancing opportunities. even aggressive strategic allocations typically include 10-20% in bonds to provide stability during market downturns and enable strategic rebalancing.

A is correct. Strategic asset allocation establishes long-term baseline target percentages for each asset class based on the client's risk tolerance, time horizon, investment objectives, and other suitability factors. These targets remain relatively stable over years and are not adjusted for short-term market conditions. Tactical asset allocation, in contrast, makes temporary deviations from strategic targets to capitalize on perceived short-term market opportunities or economic forecasts (e.g., overweighting stocks if bull market is anticipated, or increasing cash during expected volatility).

B is backwards: asset allocation (both strategic and tactical) determines asset CLASS percentages (stocks, bonds, cash), not individual security selection. Security selection happens within each asset class after allocation decisions are made. C reverses the definitions: strategic allocation is passive and policy-driven with periodic (not frequent) rebalancing to maintain targets, while tactical allocation is active with more frequent adjustments based on market timing. D is incorrect. both strategic and tactical allocation apply to all asset classes and portfolio types, not limited to specific asset classes.

B is correct. This option properly matches strategic allocation to each client's risk profile, time horizon, and life stage.

Client A (85/12/3): Aggressive allocation appropriate for a young investor with long time horizon, high risk tolerance, and ability to weather market volatility over 37 years. Maximum equity exposure for long-term growth.

Client B (60/35/5): Balanced allocation suitable for pre-retiree with moderate risk tolerance and 10-year horizon. Maintains growth potential while increasing stability as retirement approaches. The 60/40 stocks/bonds split is a classic moderate strategic allocation.

Client C (30/50/20): Conservative allocation for retired client needing income and capital preservation. Higher bond allocation generates income, significant cash for living expenses and emergencies, limited stock exposure for some growth to combat inflation but minimized volatility risk.

A reverses the risk progression, giving the youngest client (longest horizon, highest risk tolerance) the most conservative allocation and the oldest retired client the most aggressive allocation. C (100% stocks for all) ignores individual differences in risk tolerance, time horizon, and life stage, violating suitability requirements. D assigns allocations completely backward to client profiles, with the conservative retiree getting 70% stocks and the aggressive young professional getting only 30% stocks.

C is correct (the EXCEPT answer). This statement is FALSE and describes tactical asset allocation, not strategic allocation. Strategic allocation targets are based on LONG-TERM client characteristics (risk tolerance, time horizon, objectives) and remain relatively stable over years, NOT adjusted for short-term market forecasts, economic indicators, or market timing attempts. Making frequent adjustments based on market predictions is the hallmark of tactical allocation, which represents temporary deviations from strategic targets.

A is accurate: strategic allocation is fundamentally driven by client suitability factors including risk tolerance, time horizon, investment objectives, tax status, liquidity needs, and financial situation. These determine the appropriate long-term asset class mix. B is accurate: strategic allocation represents the portfolio's baseline policy and is typically documented in the Investment Policy Statement (IPS) as the target allocation. It remains stable unless the client's circumstances or objectives fundamentally change (e.g., approaching retirement, major life change). D is accurate: while strategic targets remain stable, actual portfolio percentages drift due to different asset class returns. Periodic rebalancing (e.g., annually or when allocations drift beyond tolerance bands) restores the strategic target percentages.

A is correct. Only statements 1 and 3 align with strategic asset allocation principles.

Statement 1 is TRUE: Strategic allocation requires periodic rebalancing to maintain target percentages when market movements cause portfolio drift. The portfolio has drifted from 70/25/5 to 77/20/3, representing a 7 percentage point overweight in stocks. Rebalancing back to strategic targets maintains the intended risk-return profile and risk exposure consistent with the client's objectives and constraints. This also creates a disciplined "buy low, sell high" mechanism.

Statement 2 is FALSE: This represents performance chasing and abandons strategic allocation discipline. Strategic allocation principles require maintaining targets regardless of recent performance or market momentum. Allowing drift based on performance contradicts the long-term, policy-driven nature of strategic allocation and increases risk exposure beyond the client's strategic target.

Statement 3 is TRUE: Strategic allocation targets should be documented in the Investment Policy Statement (IPS), which serves as the portfolio's governing document. The IPS establishes the strategic allocation policy, rebalancing procedures, and tolerance bands for acceptable drift before rebalancing is triggered.

Statement 4 is FALSE: This describes tactical allocation or performance chasing, not strategic allocation. Strategic targets should NOT be adjusted based on current market conditions, momentum, or short-term performance. Strategic allocation changes only when the CLIENT'S circumstances, objectives, or constraints fundamentally change (e.g., approaching retirement, change in risk tolerance, major life event), not based on market performance.