Asset Allocation

Core Concepts

Strategic Asset Allocation (SAA)

The long-term policy portfolio based on an investor's risk tolerance, return objectives, time horizon, and constraints. SAA determines the baseline target weights (e.g., 60% equity / 30% bonds / 10% alternatives) and is the dominant driver of long-term portfolio returns. SAA should be revisited when investor circumstances change, not in response to market movements.

Tactical Asset Allocation (TAA)

Short-to-medium-term deviations from the SAA based on market views, valuations, or momentum signals. TAA requires a disciplined process to avoid becoming ad hoc market timing. Key considerations:

• Define allowable deviation bands (e.g., +/- 10% from SAA)
• Have a clear signal framework (valuation, momentum, macro)
• Set reversion rules: when to return to SAA weights

Mean-Variance Optimization (MVO)

Markowitz's framework for finding optimal portfolio weights that maximize risk-adjusted return:

max w'*mu - (lambda/2) * w'Sigmaw

subject to: sum(w_i) = 1, w_i >= 0 (if long-only), and any additional constraints.