Alternative Investments & Volatility

CFA Level III Alternative Investments
#1

I’m trying to understand the distinction between these two statements in the CFA readings about Alternative Assets, which seem contradictory to me at first glance, appreciate any help…

In relation to a shift in asset allocation from 60/40 equities/fixed-income to 50/20/30 equity/fixed-income/alternative assets, the readings state:

(1) pension portfolio volatility will be reduced b/c of lower correlation among asset returns

(2) [including] alternative investments entails greater manager selection risk and larger dispersion of returns around the policy benchmark

What am I missing?

#2

The entire portfolio will have lower volatility where the correlations among the asset classes is low (think back to that ugly portfolio variance formula); the alternative asset class on its own will have high volatility and might go outside the benchmark for the alternative asset class.

#3

Thanks that makes sense. I still don’t understand the relevance of mentioning the volatility of the asset class in isolation. Maybe for short term liquidity considerations

#4

Thanks for this post. It is very helpful to us.