Canadian Securities Course (CSC) Level 2 Practice Exam

Which action is advisable for tactical asset allocation in investment strategies for ETFs?

1. Buying and holding for the long term

2. Allocating funds based solely on domestic assets

3. Maintaining cash holdings at all times

4. Exiting previous holdings quickly and diversifying exposure

The correct answer is: Exiting previous holdings quickly and diversifying exposure

Tactical asset allocation involves actively adjusting the asset mix in a portfolio based on short-term market opportunities or economic forecasts. The correct approach in this context is to exit previous holdings quickly and diversify exposure. This strategy allows investors to capitalize on perceived opportunities in different asset classes or sectors, adapting to changing market conditions and potentially enhancing returns. By adjusting the allocation frequently, investors can mitigate risks associated with market downturns and seize growth prospects in various sectors. This flexibility is what distinguishes tactical asset allocation from more static investment strategies, such as simply buying and holding assets for the long term. In contrast, holding assets indefinitely does not take advantage of market fluctuations or economic changes. Focusing strictly on domestic assets can limit portfolio diversification, which is less effective than a tactical approach that considers international markets as well. Maintaining constant cash holdings may lead to missed investment opportunities, as cash does not generate returns and can lag behind equity or bond market performance. Thus, quickly exiting previous holdings and diversifying provides the greatest adaptability and potential for profit.