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Study Session 8-9: Asset Allocation and Related Decisions in Portfolio Management

liability-relative approach: modeling liabilities

I cannot wrap my head around this one - could someone pls explain why inthe liability-driven approach, modeling liabilities can be done by shorting bonds that match the duration and present value of liabilities?

Thank you :)

Asset allocation - taxable portfolio

A taxable portfolio should be less frequently rebalanced. Due to: 

1. Frequent rebalancing leads to realizing gains, hence you pay more in taxes (higher taxable income)

2. A tighter corridor involve higher transaction costs, therefore it is better to have a wider range/corridor. Also, due to the lower volatility after-tax, you need larger movements to change the volatility/risk level. 

Why would you want to increase the risk level in this case? Because higher risk leads to better returns, OK, but is there any kind of aspect I´m missing here? 

optimal asset allocation - MTCR and Sharpe

Excess Return over MTCR’s formula is equivalent to a Sharpe Ratio.
The calculation is: (Rp -Rf) / MCTR
The Sharpe ratio adjusts for risk, and can help you determine the investment choice that will deliver the highest returns
while considering risk.

However, I still cannot understand why an optimal asset allocation involves the fact that ALL assets have MCTR and hence equal Sharpe ratios? Why is not an optimal asset allocation involving assets with highest Sharpe ratios? (but not necessarily equal?)


Reading 13 .Principles of Asset Allocation ( page 125 - The Smiths example)


Can someone explain to me how they are working out the figures on the Smiths example.

1. I got this answer right. 

2. This answer was later corrected to 6,275,000 but I still cant get to that answer.

3. I got 6,691,026 for this one

4. I got 2,682,718

Can someone let me know where I am getting wrong.


Quick Question about portfolio rebalancing

Hello dears,

in reading 12: Overview of Asset allocation p. 52 in CFAI Book .. under strategic consideration in rebalancing it written that all else being equal: “less correlated” assets also have tighter rebalancing ranges. 

is it correct? or am i missing something here. coz i think, since they are less correlated, that means lower risk and accordingly the range might be wider. 

anybody have an answer for me?

Strategic asset allocation

Does anyone know where I can find in the text where it mentions that strategic asset allocation is the biggest contributor to portfolio performance?

Currency options

If there is an USD/EUR currency pair:

  • Is buying a OTM call on EUR same as buying a OTM put on USD?
  • Is selling a OTM call on EUR same as selling a OTM put on USD?

Last minute doubt - currency management/ over under hedge

The portfolio has a long exposure to CHF 10,000,000 . To hedge it the portfolio manager sold CHF forward. 1 month later, the value of CHF is 11,000,000 , so to rebalance it as per dynamic hedging we will sell additional CHF 1 million to increase the hedge.

Now, when it comes to currency we over hedge if the currency is expected to depreciate and under hedge if we expect it to appreciate (to capture the upside potential of currency). But why not do the same thing for the asset exposure above?

Asset Class Criteria

Would it be correct to say that inflation-indexed bonds and nominal bonds are mutually exclusive?

Kaplan Practice Exam Vol1 Exam 1 Q24 - Afternoon

Hi all.

The question asks to validate a statement - the client has a long yen exposure. The statement is:

An alternative to seeling the yen forward to implement a currency hedge would be to buy calls on the USD. This would protect the portfolio from currency risk while still retaining potential currency upside.