PRINCIPLES OF ASSET ALLOCATION

Jean L.P. Brunel CFA, Thomas M. Idzorek CFA and John M. Mulvey PhD

Jean L.P. Brunel, CFA, is at Brunel Associates LLC (USA). Thomas M. Idzorek, CFA, is at Morningstar (USA). John M. Mulvey, PhD, is at the Bendheim Center for Finance at Princeton University (USA).

LEARNING OUTCOMES

The candidate should be able to:

• describe and evaluate the use of mean–variance optimization in asset allocation

• recommend and justify an asset allocation using mean–variance optimization

• interpret and evaluate an asset allocation in relation to an investor’s economic balance sheet

• recommend and justify an asset allocation based on the global market portfolio

• discuss the use of Monte Carlo simulation and scenario analysis to evaluate the robustness of an asset allocation

• discuss asset class liquidity considerations in asset allocation

• explain absolute and relative risk budgets and their use in determining and implementing an asset allocation

• describe how client needs and preferences regarding investment risks can be incorporated into asset allocation

• describe the use of investment factors in constructing and analyzing an asset allocation

• describe and evaluate characteristics of liabilities that are relevant to asset allocation

• discuss approaches to liability-relative asset allocation

• recommend and justify a liability-relative asset allocation

• recommend and justify an asset allocation using a goals-based approach

• describe and evaluate heuristic and other approaches to asset allocation

• discuss factors affecting rebalancing policy