Portfolio Management and Asset Allocation
Portfolio Management and Asset Allocation tests the investment policy statement (IPS), risk and return, diversification, strategic versus tactical allocation, rebalancing, and performance evaluation. Questions often ask what is suitable for a client's constraints, not which asset has the highest forecast return.
Core rules
- The IPS records objectives and constraints: return need, risk tolerance, time horizon, liquidity, taxes, legal limits, and unique circumstances.
- Strategic allocation sets long-run weights; tactical allocation makes short-term deviations within policy limits.
- Diversification works best with low correlation; it reduces unsystematic risk, not systematic market risk.
- Rebalancing restores policy weights; it is a discipline, not a prediction.
- Performance should be judged against a benchmark with similar risk and holdings; return without risk is incomplete.
- Costs, turnover, and taxes affect net portfolio outcomes.
Worked example
A PHP 100 million portfolio is 60% equity and 40% bonds. Equity falls 20%, bonds are unchanged. Equity = 60 × 0.80 = PHP 48 million; bonds = PHP 40 million; total = PHP 88 million. Equity weight = 48/88 = 54.5%, below the 60% target. To rebalance, target equity = 0.60 × 88 = PHP 52.8 million; buy PHP 4.8 million of equity and sell PHP 4.8 million of bonds, assuming no costs.
Traps
Do not assume higher risk always brings higher return. Do not claim diversification removes all risk. Do not rebalance by chasing winners. Do not compare a portfolio with an inappropriate benchmark. Do not ignore liquidity or tax constraints in the IPS.