Question

You believe to have a good forecasting ability about changes in return in the market, and you are using it in managing a portfolio. Does that fall into tactical asset allocation or strategic asset allocation? Explain.

Answer 1

It falls under the category of tactical asset allocation.

Under strategic asset allocation, target allocation to each category of asset is defined based on the risk and return objectives of the investor. It is a buy-and-hold stratergy, under which the portfolio is rebalanced to the original target allocation. Target allocation, once fixed, changes only with significant changes in the risk-return objectives of the investor.

On the other hand, tactical asset allocation is an active stratergy, under which the asset allocation is adjusted regularly to take advantage of changes in market conditions. If you have a good forecasting ability to pridict the changes in market returns, you can use it to adjust your portfolio allocation accordingly and earn a positive alpha.