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The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Hossein Kazemi, Garry B. Crowder, Thomas Schneeweis

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CHAPTER 5
Strategic, Tactical, and Dynamic Asset Allocation
One of the limitations of many current asset allocation approaches is that they concentrate primarily on investment in a limited number of assets (stocks, bonds, and real estate). Today, investment in a larger range of investable assets is being addressed through more active asset construction. The increase in potential investment opportunities increases the potential benefit of strategic asset allocation opportunities as well as tactical and dynamic approaches to asset allocation. Chapter 5 addresses those issues.
The term asset allocation means different things to different people in different contexts. For our purposes we have divided asset allocation decisions into three often-used categories:
Strategic asset allocation can be characterized as a long-term asset allocation decision. The objective is to determine the long-term normal asset mix that will represent the desirable balance of risk and return. In developing the strategic asset allocation, the investor’s return objectives, risk tolerance, and other investment constraints have to be taken into account. Next, the set of asset classes that are permissible under the investor’s investment policy statement are used to establish the optimal long-run mix. If the portfolio’s performance is evaluated using a specific benchmark, then strategic allocation would correspond to the mix represented by the benchmark. The investment policy statement would need to spell out ...

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