EOC - Asset Allocation

[broadex]

Paula Williams is the chair of the investment committee of a RFM’s pension plan. The committee has established the strategic allocation and you are given a table of target allocation against permissible range.. The RFM pension liability can be modelled approximately as a short position in a long term bond. The expected return on a long term bond is 4.5 percent.
Q .Discuss the effects of the following implementation choices on the measured importance of RFM’s policy portfolio
1. Rebalancing to policy mix
2. Investing actively within an asset class or indexing to an asset
3. Adopting a policy portfolio that is much different from those of peers
DOES ANYONE UNDERSTAND THE ANSWERS TO THESE 3 QUESTIONS???

 

[ink]

i think that a better explanation can be found in section 2. They basically have a very similar example there to the EOC question.
My takeaway is that in portofolios that rebalance frequently to mirror a specific asset class mix, asset allocation will explain a larger share of varinace in returns. In portofolios with active investing strategic asset allocation plays a lesser role in explaning variance of returns.

 

[broadex]

Thanks INK that clarifies my understanding. Just rewording this in my own words:

• CFAI starts by saying SAA explains 93% of asset returns (section 2)
• So if you frequently rebalance to meet the SAA eg by investing in indexed investment classes, your returns are explained by SAA
• On the other hand if you do a lot of TAA eg frequently trades within asset classes, then SAA wont explain the 93% of the returns as part of the returns are due to TAA.