Reading 25, Question 16

In Question 16, Reading 25 (Asset Allocation, CFAI Readings) we’re asked to determine and justify the changes in portfolio weights (in relation to target weights) based on expected long-term and short-term returns to different asset classes: Global Equity: LT return of 9%, ST return of 12% Global FI: LT return on 5.75%, ST return of 7% The answer talks about global equity ST expected return being 33% higher than LT return and global FI ST return 22% higher. “Because global equities appear more undervalued than global bonds, increase the weight in global equities…”. Based on what global equities appear to be more undervalued than global bonds? Can we conclude it from just looking at LT returns or do we have to compare LT and ST returns? How’s that comparison of LT and ST returns important in this analysis? Thanks!

its a relative value analysis, you are seeing how Under/Over valued are GLobal Equities compared to Global FI…

tanyusha, yes comparison of LT and ST is required. As ST is larger than LT and the % difference is higher for Equities than FI, it makes sense to tilt the portfolio towards equity.

So the idea is to capture this ST return?