115 CFA
File: Portfolio Management - Reading 54 - 4. Portfolio Construction

4. Portfolio Construction

f. explain the specification of asset classes in relation to asset allocation;

g. describe the principles of portfolio construction and the role of asset allocation in relation to the IPS.

What is an asset class?
An asset class is a group of securities that exhibit similar characteristics and behave similarly in the marketplace (risk-return relationship).

What is asset allocation?
Asset allocation is the process of choosing among various kinds of possible asset classes.

What is a strategic asset allocation (SAA)?
A strategic asset allocation (SAA) involves an examination of capital markets, to gauge future investment returns, combined with an understanding of portfolio objectives, risk tolerance, and constraints, to distribute a portfolio's assets effectively and efficiently among several asset classes in order to achieve the best return possible within acceptable risk levels.

What is risk budgeting?
Risk budgeting is a process by which investment managers determine how much risks should be taken and how risk can be most effectively allocated across different asset classes.

What is tactical asset allocation?
Tactical asset allocation is an active portfolio management strategy that seeks to improve portfolio value by utilizing short-term asset class weightings that differ from the long-run asset mix.

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