Understanding Tactical Asset Allocation and Risk Management

Very Hard Asset Allocation Tactical Asset Allocation

John Smith is a portfolio manager implementing a tactical asset allocation strategy for a diversified fund. He believes that geopolitical risks will negatively impact equity markets over the next 12 months, leading him to adjust his portfolio by increasing the allocation to fixed-income securities while simultaneously reducing equity exposure.

Given this context, John needs to evaluate the potential impact of this tactical decision on the fund's risk-adjusted returns compared to its original strategic asset allocation. Which of the following statements best describes the nature of tactical asset allocation in relation to risk management?

Tactical asset allocation is designed to enhance returns through short-term shifts in asset allocation based on market conditions while often increasing portfolio risk exposure.

Tactical asset allocation focuses on minimizing risk by sticking closely to the long-term strategic asset allocation without making adjustments based on market movements.

Tactical asset allocation seeks to capitalize on perceived market inefficiencies and adjusts the allocation based on forecasts, aiming to maintain or lower overall portfolio risk.

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