Strategic Asset Allocation Decision

Hard Asset Allocation Strategic Asset Allocation

As an investment manager at a mid-sized asset management firm, you are responsible for formulating the firm's Strategic Asset Allocation (SAA). Your analysis of historical performance indicates that equities have typically outperformed fixed income securities over the long term. However, recent market volatility has raised concerns about potential risks in equity markets, leading to reconsideration of the asset mix.

You have been tasked with revising the asset allocation strategy to enhance risk-adjusted returns while maintaining the firm's required return objective. The firm's investment policy statement indicates a target allocation of 60% equities and 40% fixed income, with rebalancing occurring annually.

Under this context, which of the following adjustments to the Strategic Asset Allocation would likely provide the best improvement to the expected Sharpe ratio over the next five years?

Increase the equity allocation to 70% and decrease fixed income to 30%.

Maintain the existing allocation of 60% equities and 40% fixed income.

Shift 10% from equities to alternative investments such as real estate or commodities.

Hint

Submitted8.6K

Correct4.2K

% Correct49%