Chapter 8. The Cyclical Asset Allocation Strategy’s Versatility

Many asset-allocation approaches drive home the point that there should never be any unintended bets made in a portfolio. This is correct. But, in making this point, many financial advisors argue—given the same expected returns combination—the different market variables’ variance–covariance matrix produce the same allocation each and every time. The cyclical asset allocation (CAA) approach differentiates itself in important ways. The probabilities for CAA are derived from (and related to) the overall economic environment and the investor’s outlook. If probabilities and/or allocations do not match an investor’s outlook, either the allocations or the outlook must change to align the ...

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