Optimal Strategic Asset Allocation for Moderate Risk Client

Maria Garcia is a seasoned portfolio manager at XYZ Wealth Management, where she is responsible for the strategic asset allocation of a high-net-worth client's investment portfolio. The client has a long-term investment horizon of 20 years and a risk tolerance classified as moderate. Maria is currently evaluating various asset classes, including equities, fixed income, real estate, and alternative investments.

The market conditions are shifting with rising interest rates and increased volatility in equity markets. Maria has to determine the optimal long-term strategic asset allocation that not only aligns with her client’s risk tolerance but also considers the expected returns of each asset class. Given these considerations, Maria is contemplating three different strategic asset allocations:

1. 50% equities, 30% fixed income, 15% real estate, 5% alternatives

2. 40% equities, 40% fixed income, 15% real estate, 5% alternatives

3. 60% equities, 20% fixed income, 15% real estate, 5% alternatives

Which asset allocation best aligns with the client's moderate risk tolerance and long-term investment horizon in light of the current market conditions?