Canadian Securities Course (CSC) Level 2 Practice Exam

Which type of asset allocation strategy involves reallocating back to the original mix by selling performing assets and buying underperforming assets?

1. Dynamic asset allocation

2. Tactical asset allocation

3. Strategic asset allocation

4. Integrated asset allocation

The correct answer is: Strategic asset allocation

Strategic asset allocation is a long-term investment strategy that establishes a baseline target for asset classes in a portfolio, based on an investor's risk tolerance and investment goals. This approach typically involves periodically rebalancing the portfolio back to the original asset allocation mix. The rebalancing process can lead to selling assets that have performed well, hence representing a larger portion of the portfolio than intended, and using the proceeds to buy assets that have underperformed. This method helps to maintain the desired level of risk and takes advantage of the potential for value in the underperforming assets, aligning the portfolio with the investor's long-term financial objectives. Dynamic, tactical, and integrated asset allocations each have different characteristics. Dynamic asset allocation focuses on making changes in response to market conditions rather than adhering to a fixed strategy. Tactical asset allocation allows for temporary deviations from the strategic asset allocation to capitalize on perceived market inefficiencies. Integrated asset allocation incorporates both strategic and tactical elements, but does not specifically emphasize returning to a pre-defined mix in the way strategic asset allocation does. Thus, strategic asset allocation is the approach that best matches the description of rebalancing to an original mix by selling performing assets and buying underperforming ones.