Strategic & Tactical Asset Allocation Flashcards
Define Strategic Asset Allocation?
setting a mix of stocks, bonds, and other assets that’s appropriate for you given where you are in your life cycle.
When would one change their strategic asset allocation?
only when there are sufficient changes in your age, time horizon, risk tolerance, or overall level of savings and wealth to justify making an adjustment to your plan.
What is TAA?
Tactical asset allocation (TAA) is an investment style in which the three primary asset classes (stocks, bonds and cash) are actively balanced and adjusted. The ultimate strategy of tactical asset allocation is to maximize portfolio returns while keeping market risk to a minimum, as compared to a benchmark index.
What is the Aim of TAA?
to acheive equity like returns with bond like volatility and draw downs.
What are broad weighting TAA shifts?
This is where you change your Equity, Bond and cash allocations to possibly take advantage of an opportunity.
Post GFC 10 year bonds are 2.5%, The nominal yield correlates well with the 10 year future return. Hence this is half the LT rate of 5% for Long bonds and so investors would want to allocate more towards equities in this environment.
Describe changing Asset Class sub allocations in TAA?
maintain your overall mix between stocks and bonds, but within the equity portion of your portfolio, tweak your exposure to large, small, foreign, and emerging market shares.
And within your fixed-income portfolio, tweak your blend among government, corporate, and foreign securities.
Describe how TAA can be adopted with a core and explore strategy?
The investor would potentially have 90% of their portfolio (Core) is a static strategic allocation that is not touched (say 55% stocks and 35% bonds) and then the other 10% (the expore) is allocated more dynamically across time.
Describe the process of using quantitative market timing as a TAA tool?
Jeremy Seigel in Stocks for the Long run uses data 1973-2006 and allocates between Nasdaq and Tbills when the Nasdaq is >1% below the 200dma. Data shows that including costs the market timing system outperformed buy and hold by 4%pa with 25% less volatility.
Describe the Meb Faber 1900-2012 quantitative market timing TAA approach using monthly data?
Conducted on the S&P using a 10mma and 90d Tbills. This excluded costs but found 10.3% return (B&H) 9.3%, but volality was 12% (18%), sharpe was 0.55% v 0.32, and max DD was 50% v 83%.
What about the results from the Faber Global Tactical Asset Allocation 5 Model?
consists of five global asset classes: US stocks, foreign stocks, bonds, real estate and commodities and is either long each asset 20% or is in cash. Uses the 10mma.
1973-2012 and returns are 10.7% (9.3%), Vol is 6.9% vs 10.7%, sharpe is 0.73 v 0.44, max DD is 9.5% v 46%.
What about the results from the Faber Global Tactical Asset Allocation 13 Model?
Same as above with more sub asset class allocations to 13 assets.
1973-2012 and returns are 12% (9.3%), Vol is 7% vs 10.7%, sharpe is 0.94 v 0.44, max DD is 10.2% v 46%.
What is TAA style tilts?
Value/Growth tilt or Large cap/Small Cap tilts or High beta/Low vol tilt, Financial assets/hard assets,
