Asset Allocation Part I: Performance Evaluation

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What is the main focus of asset allocation?

Achieving high correlation within asset classes

Maximizing returns on individual securities

Minimizing exposure to systematic risk

Balancing return correlations between asset classes (correct)

Why should the elements of an asset class be homogeneous?

To increase systematic risk exposure

To exhibit a similar risk-return profile (correct)

To achieve a higher correlation with other asset classes

To maintain a low correlation within the asset class

What does a relatively low correlation between asset classes indicate?

Decreased portfolio diversification

Greater potential for systematic risk

Opportunity for achieving greater diversification (correct)

Increased exposure to specific risk factors

Why is it necessary to be more specific about bonds for the purpose of asset allocation?

To understand the relevant dimensions of the bond space Signup and view all the answers

What is the primary reason for redefining asset classes when the criteria are not met?

To place some under the same heading and segregate others Signup and view all the answers

What are the relevant dimensions of the equity space?

Capitalization, styles, sector belonging, interest rate sensitivity Signup and view all the answers

What do real estate and private equity have in common as alternative assets?

Both are affected by cyclical and monetary policy changes Signup and view all the answers

What are the relevant determinants of the investment universe?

Time horizon, investment policy, pricing anomalies, investment strategy Signup and view all the answers

What are the maximum volatility of returns and maximum drawdown considered in?

Risk tolerance Signup and view all the answers

What does tactical asset allocation involve deviations from?

Target weights of the strategic asset allocation Signup and view all the answers

What was the average outperformance of the fundamentally-based indices compared to cap-weighted indices?

197 basis points Signup and view all the answers

What counter-argument was raised by Perold (2007) against the fundamentally-based indices?

They are not macro-consistent Signup and view all the answers

According to Kaplan (2008), what must fundamentally-based indices have in order to add value?

Higher correlation with fair value Signup and view all the answers

What is the main advantage of style-based indices according to the text?

They are more suitable for various styles of investment Signup and view all the answers

What significant difference was highlighted between the S&P 600 and the Russell 2000 index?

Significant difference in performance Signup and view all the answers

What are the central questions in the context of performance evaluation?

Did the return produced by the manager justify the risk taken? and Which decisions gave rise to over- or underperformance? Signup and view all the answers

Which of the following is NOT a criterion for a suitable benchmark as discussed in the text?

Actively managed Signup and view all the answers

What advantage do cap-weighted indices have according to the text?

They are a relevant and cheap alternative to active fund management Signup and view all the answers

Why have some experts raised doubts about the suitability of cap-weighted indices?

"Overpriced stocks" tend to assume an increasing weight in the index, while "underpriced stocks" will assume a declining weight Signup and view all the answers

What is the basis for proposing fundamentally-based indices as an alternative to cap-weighted indices?

"Overpriced stocks" tend to assume an increasing weight in cap-weighted indices Signup and view all the answers