8.2 Asset Allocation Strategy

Question 1

Investment policy statement (IPS) and strategic asset allocation
Seven typical components

1. Background
   2 …
   3 Asset classes
   4 Governance
   5 …
   6 Reporting & monitoring
   7 …

Answer 1

Objectives & constraints

Manager selection

Strategic asset allocation

Question 2

Differentiate between tactical and strategic asset allocation.

SAA = portfolio with … between risk & return over long-term

TAA = adjustment of SAA on…

Answer 2

optimal balance

short/mid-term forecast

Question 3

Theoretical approaches for Asset Allocations:

Asset class return =

Expected Utility Approach

…

Efficient Frontier

…

Answer 3

real interest rate + inflation + risk premium

Mean-Variance optimisation

Factor-Investing (incl. CAPM)

Question 4

Modern Portfolio Theory

▪ Main concept: maximize return (i.e. mean) for a given level of risk (i.e. variance) or…
▪ Risk-averse investors will choose the portfolio with …→Mean-variance opportunity set
▪ This encourages asset diversification to …
▪ Compare alternative assets to conventional securities using portfolio theory in order to …

Answer 4

minimize risk for a given level of expected return

optimal tradeoff between risk and return

hedge against market risk

make scientifically grounded investment decision

Question 5

Do Alternative Investment Managers really generate Alpha?

Erik Stafford: Replicating Private Equity
“Institutions with large allocations [in private equity] likely either have significantly more risk than they realize and/or to have a meaningful internal agency conflict. (…) The results indicate that …

Answer 5

sophisticated institutional investors appear to significantly overpay for the portfolio management services associated with private equity investments.”

Question 6

▪ Key question: is it possible to replicate the properties of a private equity portfolio with passive, publicly traded instruments?
▪ Yes, by …, homemade leverage and …
▪ This strategy with liquid assets yields the same return as a…
▪ Therefore, high fees are not always justifiable. An … thus may arise

Answer 6

creating a portfolio consisting of low EBITDA multiple stocks; hold-to-maturity accounting

pre-fee private equity index

internal agency conflict