Carve Out Cash Allocation

A fund has an opening allocation - 50% equity, 45% bond, 5% cash. The strategic allocation is 60% equity, 40% bond. If the equity portion needs to be carved out for composite return calcs, how do you allocate the cash to the carve out portion using the strategic asset allocation method? If I follow the example in Schweser, Opening equity + cash allocation to carve out = strategic eq alloc —> Cash allocation = 10%… But if there is only 5% cash to start with, why do we have to allocate 10% cash to equity carve out??? - BN

there are two ways to calculate cash’s return on the asset allocation. one is based on the current portfolio weights (ex. cash)…ie equity weight = equity market value / (equity mv + debt mv) and then allocate based on that. the other way is to allocate based on strategic asset allocation. in this case, SAA is 60% equity so you adjust the cash return to bring up the equity allocation to represent a 60% allocation to equities.

Do we need to know how to do this calculation? There is no mention of this in Stalla :frowning:

strikershank Wrote: ------------------------------------------------------- > > > the other way is to allocate based on strategic > asset allocation. in this case, SAA is 60% equity > so you adjust the cash return to bring up the > equity allocation to represent a 60% allocation to > equities. And how do you do that in this example? :wink: I.e. how do I go from 50% equity 45% bonds 5% cash to 60% equity, 40% bond? I don’t think I am allowed to sell bonds! My view is that it is impossible to allocate cash to equity to get 60% equity allocation, so allocate all of it to get to 55% equity - that’s the best you can do. In Schweser example, it was easy going from 50% equity, 40% bond, 10% cash to 55% equity, 45% bond.