Chapter 05-07 Asset Allocation

Question 1

Active risk budgeting

Answer 1

Risk budgeting that concerns active risk (risk relative to a portfolio’s benchmark).

Question 2

Asset-only

Answer 2

With respect to asset allocation, an approach that focuses directly on the characteristics of the assets without explicitly modeling the liabilities.

Question 3

Calendar rebalancing

Answer 3

Rebalancing a portfolio to target weights on a periodic basis; for example, monthly, quarterly, semiannually, or annually.

Question 4

Decision-reversal risk

Answer 4

The risk of reversing a chosen course of action at the point of maximum loss.

Question 5

Dynamic asset allocation

Answer 5

A strategy incorporating deviations from the strategic asset allocation that are motivated by longer-term valuation signals or economic views than usually associated with tactical asset allocation.

Question 6

Economic balance sheet

Answer 6

A balance sheet that provides an individual’s total wealth portfolio, supplementing traditional balance sheet assets with human capital and pension wealth, and expanding liabilities to include consumption and bequest goals. Also known as holistic balance sheet.

Question 7

Extended portfolio assets and liabilities

Answer 7

Assets and liabilities beyond those shown on a conventional balance sheet that are relevant in making asset allocation decisions; an example of an extended asset is human capital.

Question 8

Goals-based

Answer 8

With respect to asset allocation or investing, an approach that focuses on achieving an investor’s goals (for example, related to supporting lifestyle needs or aspirations) based typically on constructing sub-portfolios aligned with those goals.

Question 9

Goals-based investing

Answer 9

An investment industry term for approaches to investing for individuals and families focused on aligning investments with goals (parallel to liability-driven investing for institutional investors).

Question 10

Home-country bias

Answer 10

The favoring of domestic over non-domestic investments relative to global market value weights.

Question 11

Liability-driven investing

Answer 11

An investment industry term that generally encompasses asset allocation that is focused on funding an investor’s liabilities in institutional contexts.

Question 12

Liability glide path

Answer 12

A specification of desired proportions of liability-hedging assets and return-seeking assets and the duration of the liability hedge as funded status changes and contributions are made.

Question 13

Liability-relative

Answer 13

With respect to asset allocation, an approach that focuses directly only on funding liabilities as an investment objective.

Question 14

Passive management

Answer 14

A buy-and-hold approach to investing in which an investor does not make portfolio changes based upon short-term expectations of changing market or security performance.

Question 15

Percent-range rebalancing

Answer 15

An approach to rebalancing that involves setting rebalancing thresholds or trigger points, stated as a percentage of the portfolio’s value, around target values.

Question 16

Rebalancing

Answer 16

In the context of asset allocation, a discipline for adjusting the portfolio to align with the strategic asset allocation.

Question 17

Rebalancing range

Answer 17

A range of values for asset class weights defined by trigger points above and below target weights, such that if the portfolio value passes through a trigger point, rebalancing occurs. Also known as a corridor.

Question 18

Risk budgeting

Answer 18

The establishment of objectives for individuals, groups, or divisions of an organization that takes into account the allocation of an acceptable level of risk.

Question 19

Shortfall probability

Answer 19

The probability of failing to meet a specific liability or goal.

Question 20

Tactical asset allocation

Answer 20

Asset allocation that involves making short-term adjustments to asset class weights based on short-term predictions of relative performance among asset classes.

Question 21

Trigger points

Answer 21

In the context of portfolio rebalancing, the endpoints of a rebalancing range (corridor).

Question 22

Resampled mean-variance optimixation

Answer 22

Combines Markowitz’s mean-variance optimization framework with Monte Carol simulation and, all else equal leads to more-diversfied asset allocations.