Tactical Asset Allocation

B is correct. This represents appropriate tactical asset allocation: a modest, temporary deviation from the 70/30 strategic baseline (reducing stocks from 70% to 65%) based on specific economic concerns, with the explicit intention to return to the strategic allocation once recession risks diminish. The adjustment is measured and reversible.

A is incorrect because changing the strategic allocation is a permanent, long-term decision based on client profile changes (age, risk tolerance, goals), not short-term market conditions. Strategic allocation should not change due to temporary economic outlook. C is incorrect because rebalancing means restoring the strategic allocation after market drift, not making market-based adjustments. Rebalancing is passive maintenance, not active tactical positioning. D is incorrect because this represents extreme market timing and abandons the strategic allocation entirely. Moving to 100% cash is unsuitable for a moderate-high risk tolerance client and represents panic selling rather than tactical adjustment.

B is correct. Strategic asset allocation establishes long-term baseline target percentages for each asset class based on the client's objectives, time horizon, and risk tolerance (e.g., 60/40 stocks/bonds). Tactical asset allocation makes short-term, temporary deviations from those strategic targets to capitalize on market opportunities or avoid risks, with the intention of returning to the strategic baseline.

A is incorrect because both strategic and tactical allocations are based on CLIENT circumstances and objectives, not adviser preferences. The adviser implements allocations suitable for the client. C is incorrect because both strategic and tactical approaches can use index funds, actively managed funds, or combinations of both. The fund type is separate from the allocation strategy. D is incorrect because neither strategic nor tactical allocation mandates specific rebalancing frequencies. Rebalancing schedules depend on portfolio policy, transaction costs, and market drift thresholds, not the allocation approach.

B is correct. This represents tactical asset allocation: making a temporary adjustment from the strategic baseline (65/30/5) to a more defensive position (60/35/5) based on current market conditions (elevated valuations), with explicit intention to return to the strategic allocation when conditions change. This is temporary and market-driven.

A is incorrect because this describes rebalancing—restoring the portfolio to the strategic target allocation after market drift. Rebalancing is passive maintenance, not tactical adjustment. C is incorrect because this describes changing the strategic allocation itself, which is a permanent adjustment based on client profile changes (new risk tolerance from career advancement), not a temporary market-based move. D is incorrect because this describes drift or passive management, not tactical allocation. Allowing drift means letting market movements change the allocation without taking action, which is neither tactical nor strategic decision-making.

C is correct (the EXCEPT answer). This statement is FALSE. Tactical allocation does NOT permanently adjust baseline allocation targets. Permanent adjustments to baseline targets based on client risk tolerance changes represent strategic allocation changes, not tactical allocation. Tactical allocation is specifically characterized by TEMPORARY adjustments intended to return to the strategic baseline.

A is accurate: tactical allocation involves making short-term deviations from the strategic (baseline) allocation based on current market conditions, economic outlook, or valuation assessments. B is accurate: because tactical allocation requires more frequent trading to make market-based adjustments and later return to strategic targets, it incurs higher transaction costs, potential tax consequences, and typically higher advisory fees than passive buy-and-hold strategies. D is accurate: the defining characteristic of tactical allocation is its temporary nature—adjustments are made with the explicit intention of returning to the strategic allocation once market conditions or economic outlook changes.

B is correct. Statements 1, 2, and 4 accurately describe tactical asset allocation.

Statement 1 is TRUE: Tactical allocation makes temporary adjustments based on current market conditions, economic outlook, valuations, or near-term forecasts, not based on changes to the client's long-term profile (age, risk tolerance, time horizon). The client profile determines strategic allocation; market outlook drives tactical adjustments.

Statement 2 is TRUE: A defining characteristic of tactical allocation is the intention to return to the strategic baseline allocation once market conditions change. For example, if temporarily defensive due to recession concerns, the adviser plans to return to the strategic allocation when the economy recovers. This distinguishes tactical from permanent strategic changes.

Statement 3 is FALSE: Tactical allocation does NOT eliminate the need for strategic allocation. Strategic allocation establishes the long-term baseline targets that serve as the foundation. Tactical adjustments are deviations FROM the strategic baseline, which must exist first. You cannot make temporary deviations without a permanent baseline to deviate from.

Statement 4 is TRUE: While tactical allocation is a legitimate active management approach, excessive or frequent tactical changes without clear economic justification may constitute unsuitable market timing (attempting to predict short-term price movements) or churning (excessive trading to generate advisory fees), both of which violate fiduciary duties and regulatory standards.