Choosing Asset Allocation Portfolios

I’ve come across alot of questions where I am to choose the better portfolio from A, B, C, or D than the original portfolio. But when I read the answer key they choose a portfolio and justify their pick by comparison to the other portfolio. Apologize if this has been discussed before, just confused what we’re to do on the exam.

This one is a lottery ticket. If you get it right you get a lot of points. The approach I prefer is to check which one is the best portfolio based on - Returns Std Deviation Correlation with other assets in the portfolio Sharpe Ratio Diversification Unique Constraints.

CareerChangers, I go through the same checklist, but if they ask for justification I get confused whether I am suppose to compare it to the other portfolios or to the original allocation

It’s a 3 step process - 1. Knock off the ones which don’t make the cut based on the criteria. 2. Of the remaining use your judgement to pick the best one. 3. Pray that your judgement matches CFAIs.

Oooo I love those questions :slight_smile:

we wont see them on our exam. These are old questions IMHO

^not true. We might see them. Its part of SAA.

^totally could see them - why wouldn’t we. 100% fair game, no question about it. i filter by: 1) does it meet the return requirement (pray you got the requirement right) 2) does it meet the shortfall risk, if given 3) does it hold assets that aren’t allowed (given from the IPS) then we get into the subjective ones: 4) how large is the cash position and is it too large or too small 5) does it appear under diversified 6) are its alternative assets too much or too little and so on…

Definitely go the Return, then Shortfall if given, then Risk, then Diversification, Cash, etc…

The only problem with these is if you screw up the Return requirement, you’re screwed.

“The only problem with these is if you screw up the Return requirement, you’re screwed.” unfortunate and true.

Unless specified in the liquidity constraint…less cash is better.