knowledge topics
Asset Allocation
KNOWLEDGE EXPECTED OF: Both CFP® Professionals and QAFPTM Professionals
- 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
- Construct a strategic asset allocation.
- Explain approaches that may be used to implement a tactical asset allocation strategy.
- Value-based
- Cyclical-based
- Construct 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.
- Explain 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- Tax rate when funds are withdrawn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.
Glossary of Verbs (mouse over to see definition)
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Define
To state exactly the meaning of
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Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
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Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
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Compare
To note the similarities and differences between two or more things
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Estimate
To determine an approximate value for
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Calculate
To find the value using mathematics
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Convert
To change from one form or purpose to another
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Evaluate
To reach a conclusion or make a judgement through careful study
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Interpret
To give the meaning of / to construe or understand / to translate orally
Read more about the Taxonomy used in the FP-BoK