Page 44 - FINAL CFA SLIDES DECEMBER 2018 DAY 12

LOS 43.g: Describe the principles of portfolio Session Unit 12:
construction and the role of asset allocation 41. Portfolio Risk and Return: Part II
in relation to the IPS., p.179

The strategic asset allocation (SAA)
will be the efficient portfolio –that
which combines the return and risk

objectives with the actual risk and
return properties of the many
portfolios along the efficient
frontier.
tanties

Sticking-to or deviating from this SAA can be deemed as passive or active investment strategy (TAA or SS):
• Tactical asset allocation (TAA) –short-term deviation from SAA weights in order to take advantage

of perceived short-term opportunities (typically, for returns).
• Security selection (SS) –long-term deviations from index weights on individual securities (typically, for

risk and return) within an asset class. E.g. over-weighing of energy stocks and under-weighing financial
stocks. Some asset classes (e.g. hedge funds, individual real estate properties, and artwork) do not

have investable indexes –as such, their incorporation is required by the nature of the asset class.

Each of these active strategies may produce higher returns but also increase the portfolio risk:
• Risk budgeting sets an overall risk limit and budgets (allocates) a portion of the permitted risk to

the systematic risk of the SAA, the risk from TAA, and the risk from SS.