Asset Allocation

KNOWLEDGE EXPECTED OF: QAFP® Professionals

Highest Knowledge Level: Evaluation

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.

  • Define asset allocation. 
  • Explain the importance of asset allocation.
  • Define types of asset allocation, such as:
    • Strategic
    • Tactical
  • Explain each type of asset allocation. 
  • Explain how asset allocation may be used to align a portfolio with risk tolerance. 
  • Explain how asset allocation may be impacted by factors such as:
    • Time horizon
    • Risk tolerance
    • Investment objectives
    • Required rate of return
    • Liquidity needs
    • Required income stream
    • Capital market expectations 
  • Explain approaches for selecting a strategic asset allocation, such as:
    • Mean-variance optimization
    • Rules of Thumb
      • 100 – Age = % of Equities in Portfolio Approach
      • Life-cycle approach
    • Ad hoc rules 
  • Explain approaches that may be used to implement a tactical asset allocation strategy.
    • Value-based
    • Cyclical-based 
  • Compare a strategic and a tactical asset allocation.
  • Calculate the changes required to engage in a tactical asset allocation strategy.
  • Explain correlation.
  • Explain the effect of correlation on an investment portfolio.
  • Explain how correlation is used to manage risk in a portfolio.
  • Interpret the correlation between two asset classes (or investments).
  • Define diversification. 
  • Explain the purpose of diversification.
  • Explain risks that may be associated with diversification.
  • Define asset location.
  • Explain the importance of asset location. 
  • Determine the factors that may affect asset location, such as:
    • Rate of return for the investment
    • Tax rate when funds are invested
    • Tax rate when funds are withdrawn
    • Nature of returns (capital gains, dividends, interest)
    • Investor behaviour and attitudes toward structure of assets / investments
  • Explain the purpose of rebalancing.
  • Explain the advantages and disadvantages of rebalancing.
    • In rising markets
    • In dropping markets 
  • Explain approaches available to choose when to rebalance, such as:
    • Temporal rebalancing
    • Rebalancing based on deviation from asset class weights 
  • Explain the impact of rebalancing.
    • On portfolio value
    • On asset classes that are growing in value
    • On asset classes that are shrinking in value 
  • Calculate the amounts required to rebalance a portfolio to its strategic asset allocation. 
  • Explain the factors of an investment portfolio that should be reviewed on a periodic basis.
    • Asset allocation
    • Asset location
    • Diversification of asset classes
    • Diversification within each asset class
  • Evaluate the factors of an investment portfolio that should be reviewed on a periodic basis. 

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Evaluation

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.

  • Define asset allocation. 
  • Explain the importance of asset allocation.
  • Define types of asset allocation, such as:
    • Strategic
    • Tactical
  • Explain each type of asset allocation. 
  • Explain how asset allocation may be used to align a portfolio with risk tolerance. 
  • Explain how asset allocation may be impacted by factors such as:
    • Time horizon
    • Risk tolerance
    • Investment objectives
    • Required rate of return
    • Liquidity needs
    • Required income stream
    • Capital market expectations 
  • Explain approaches for selecting a strategic asset allocation, such as:
    • Mean-variance optimization
    • Rules of Thumb
      • 100 – Age = % of Equities in Portfolio Approach
      • Lifecycle approach
    • Ad hoc rules 
  • Explain approaches that may be used to implement a tactical asset allocation strategy.
    • Value-based
    • Cyclical-based 
  • Compare a strategic and a tactical asset allocation.
  • Calculate the changes required to engage in a tactical asset allocation strategy.
  • Explain correlation. 
  • Explain the effect of correlation on an investment portfolio.
  • Explain how correlation is used to manage risk in a portfolio.
  • Interpret the correlation between two asset classes (or investments).
  • Define diversification. 
  • Explain the purpose of diversification.
  • Explain risks that may be associated with diversification.
  • Define asset location.
  • Explain the importance of asset location. 
  • Determine the factors that may affect asset location, such as:
    • Rate of return for the investment
    • Tax rate when funds are invested
    • Tax rate when funds are withdrawn
    • Nature of returns (capital gains, dividends, interest)
    • Investor behaviour and attitudes toward structure of assets / investments
  • Explain the purpose of rebalancing.
  • Explain the advantages and disadvantages of rebalancing.
    • In rising markets
    • In dropping markets 
  • Explain approaches available to choose when to rebalance, such as:
    • Temporal rebalancing
    • Rebalancing based on deviation from asset class weights 
  • Explain the impact of rebalancing.
    • On portfolio value
    • On asset classes that are growing in value
    • On asset classes that are shrinking in value 
  • Calculate the amounts required to rebalance a portfolio to its strategic asset allocation. 
  • Explain the factors of an investment portfolio that should be reviewed on a periodic basis.
    • Asset allocation
    • Asset location
    • Diversification of asset classes
    • Diversification within each asset class
  • Evaluate the factors of an investment portfolio that should be reviewed on a periodic basis.