Strategic Asset Allocation Decision in a Changing Market

Hard Asset Allocation Strategic Asset Allocation

ABC Asset Management is a firm with a long-term investment horizon. The firm's chief investment officer is reviewing the strategic asset allocation of their flagship portfolio, which targets a return of 8% over the long term while maintaining a risk level consistent with a moderate risk investor.

Currently, the portfolio consists of 60% in equities, 30% in fixed income, and 10% in alternative investments. The CIO is considering whether changes to the asset allocation might enhance returns while aligning with the firm's risk tolerance. Recent market conditions indicate higher expected returns for commodities and a decreasing return forecast for developed market equities. With these insights, the CIO is weighing the option of reducing equity exposure and increasing allocation to commodities.

Which of the following strategic asset allocation adjustments is likely to best align with the stated investment objectives?

Reduce equity exposure to 50% and increase commodity exposure to 20% while maintaining fixed income at 30%.

Increase equity exposure to 70% and decrease fixed income to 20%.

Change the allocation to 60% equities, 20% fixed income, and add 20% allocation to commodities.

Hint

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