As a portfolio manager at a wealth management firm, you are developing a strategic asset allocation (SAA) plan for a client with unique financial needs. The client, Marjorie, is 60 years old and has recently retired. She plans to supplement her retirement income with a withdrawal rate of 4% from her investment portfolio, which currently amounts to $2 million. Marjorie has a risk tolerance classified as 'moderate' but has expressed concern about potential market downturns affecting her income. In light of her situation, you are weighing the merits of various SAA methodologies. Your research indicates three potential approaches: 1. Using a mean-variance optimization (MVO) framework to maximize expected returns while minimizing risk through diversification across asset classes. 2. Implementing a liability-driven investment (LDI) strategy that prioritizes aligning portfolio assets with anticipated cash flow needs, focusing on more stable income-generating assets. 3. Adopting a strategic and tactical asset allocation (STAA) strategy, which combines an initial strategic asset allocation with periodic adjustments based on market conditions and economic forecasts. Which strategy would most effectively meet Marjorie's needs while managing the risks associated with her withdrawal strategy?

Exam

CFA Level 3

Section

Difficulty

Portfolio Management and Wealth Planning

Strategic Asset Allocation for Retired Client

Very Hard Asset Allocation Strategic Asset Allocation

As a portfolio manager at a wealth management firm, you are developing a strategic asset allocation (SAA) plan for a client with unique financial needs. The client, Marjorie, is 60 years old and has recently retired. She plans to supplement her retirement income with a withdrawal rate of 4% from her investment portfolio, which currently amounts to $2 million. Marjorie has a risk tolerance classified as 'moderate' but has expressed concern about potential market downturns affecting her income. In light of her situation, you are weighing the merits of various SAA methodologies.

Your research indicates three potential approaches:

1. Using a mean-variance optimization (MVO) framework to maximize expected returns while minimizing risk through diversification across asset classes.
2. Implementing a liability-driven investment (LDI) strategy that prioritizes aligning portfolio assets with anticipated cash flow needs, focusing on more stable income-generating assets.
3. Adopting a strategic and tactical asset allocation (STAA) strategy, which combines an initial strategic asset allocation with periodic adjustments based on market conditions and economic forecasts.

Which strategy would most effectively meet Marjorie's needs while managing the risks associated with her withdrawal strategy?

Using a mean-variance optimization framework to maximize expected returns.

Implementing a liability-driven investment strategy focusing on stable income.

Adopting a strategic and tactical asset allocation strategy for flexibility.

Hint

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