Tactical Asset Allocation Adjustment in Uncertain Markets

Very Hard Asset Allocation Tactical Asset Allocation

As a senior portfolio manager, you have been utilizing a tactical asset allocation strategy for your client's portfolio, which focuses on making short-term adjustments based on market conditions. Recently, you observed significant volatility in the equity markets due to geopolitical tensions and an unexpected economic downturn. As a result, you are considering adjusting your current exposure to various asset classes.

Currently, the client's portfolio is allocated as follows: 60% equities, 30% fixed income, and 10% alternatives. Your proprietary macroeconomic model suggests a high probability of continued equity underperformance in the coming quarter, while fixed income is expected to stabilize due to flight-to-quality behavior among investors.

Given this information, which of the following adjustments to the tactical asset allocation would most appropriately align the portfolio with the predicted market conditions?

Reduce equity exposure to 40%, increase fixed income to 50%, and allocate 10% to alternatives.

Maintain the current allocation of 60% equities, 30% fixed income, and 10% alternatives.

Increase equity exposure to 70%, reduce fixed income exposure to 20%, and allocate 10% to alternatives.

Hint

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