CFA Level I Exam · Basics of Portfolio Planning and Construction

Strategic Asset Allocation for CFA Level I

Updated 7 October 2026 · Fact-checked

Strategic asset allocation (SAA) sets long-term target weights across asset classes. You build it from the investor's IPS (return objective, risk tolerance, constraints) and capital market expectations. It is the main driver of long-run portfolio results. Tactical allocation then makes short-term deviations from these targets to exploit views.

Understand Strategic Asset Allocation

Strategic asset allocation is the decision about how much of the portfolio goes to each asset class over the long run. It answers a simple question: given this investor, what mix of equities, bonds, real assets and so on should we hold as the neutral, normal position?

It starts with the investment policy statement (IPS). The IPS gives the return objective, risk tolerance (ability and willingness), time horizon, liquidity needs, taxes, legal and regulatory limits, and unique circumstances such as ESG preferences. These set the boundaries of what is acceptable.

Next come capital market expectations: your long-term forecasts of return, risk and correlation for each asset class. Combine expectations with the IPS and you can search for the mix that best meets the return objective within the risk limit, often using mean-variance optimization or a similar approach. The output is a set of target weights, usually with allowed ranges around each target.

Asset classes must be chosen sensibly. Good asset class sets have assets within a class that are similar to each other and different from other classes, are diversified so the classes together cover the opportunity set, are mutually exclusive (little overlap), and are investable in sufficient size and liquidity to hold the weight you want. The weights should also be able to deliver the needed return at an acceptable risk.

Strategic allocation differs from tactical asset allocation (TAA). SAA is long term and driven by the investor's objectives and long-run expectations. TAA is a short-term, active deviation from the SAA based on views about near-term market conditions. SAA is reviewed when the investor's circumstances or long-run expectations change, and weights are brought back toward targets through rebalancing.

Key formulas to remember

Active weight: Active weight = Actual weight − Strategic (target) weight; Positive means overweight versus the strategic target. Tactical allocation creates active weights. Active weights across asset classes sum to zero when both the actual and strategic portfolios are fully invested (weights sum to 100%).
Portfolio expected return: E(Rp) = Σ wᵢ × E(Rᵢ); Use the target weights and long-term expected returns to test whether an allocation meets the return objective.
Two-asset portfolio variance: σp² = w₁²σ₁² + w₂²σ₂² + 2 w₁ w₂ ρ₁,₂ σ₁ σ₂; Use it to check that the allocation fits the risk objective. Lower correlation lowers portfolio risk.
Asset class criteria: Homogeneous within, different between, diversifying, mutually exclusive, investable; Remember this checklist for selecting asset classes.

How to solve Strategic Asset Allocation questions

Use this order for any question on strategic asset allocation, whether it is conceptual or numerical.

1Read the stem and decide what is asked: building SAA, comparing SAA with TAA, selecting asset classes, or testing an allocation.
2Pull out the IPS facts: return objective, risk tolerance (ability and willingness), horizon, liquidity, tax, legal and unique needs. The lower of ability and willingness usually governs risk.
3Note the capital market expectations given: returns, standard deviations, correlations. Treat them as long-term inputs.
4If numbers are given, compute portfolio expected return with Σ wᵢ × E(Rᵢ) and check risk if needed. Compare with the objective and the risk limit.
5Check constraints: does the allocation break a liquidity, legal or ESG limit? A mix that fails a constraint is out, whatever its return.
6Decide whether the question is long term (strategic) or short term (tactical). Views on the next few months point to TAA, not SAA.
7Eliminate the two wrong options by finding the one that breaks the IPS, mixes up strategic and tactical, or ignores a constraint.

Quickest way: Three-check elimination

When to use it: Use when you have about 90 seconds and the question is mostly conceptual or has simple weights.

Ask: is the time frame long term (SAA) or short term (TAA)? Remove options that confuse the two.
Ask: does the option meet the stated return objective and stay within the risk limit? Remove the one that fails.
Ask: does it respect liquidity, legal and other constraints? For numerical options, compute Σ wᵢ × E(Rᵢ) with the calculator only if two options remain.
Pick the remaining option. Never leave it blank, as there is no penalty for a wrong answer.

Common mistakes in Strategic Asset Allocation

Treating tactical asset allocation as the same as strategic allocation.
Both set weights across asset classes, so they sound alike.
Fix: SAA is the long-term neutral mix from the IPS and long-run expectations. TAA is a short-term deviation from it based on market views.
Choosing weights from expected return alone and ignoring risk tolerance.
Candidates chase the highest return that meets the objective.
Fix: The allocation must meet the return objective within the risk tolerance. When ability and willingness to take risk differ, use the lower.
Ignoring constraints such as liquidity or legal limits.
The numbers feel like the main part of the question.
Fix: Check every option against the IPS constraints. A high-return mix that cannot meet cash needs fails.
Picking overlapping or non-investable asset classes.
Candidates forget the selection criteria.
Fix: Use the checklist: similar within a class, different between classes, diversifying, mutually exclusive and investable at the required size.
Believing SAA is changed whenever markets move.
Confusing rebalancing and tactical shifts with a change in policy.
Fix: SAA changes when the investor's circumstances or long-run expectations change. Market drift is handled by rebalancing to the targets.

Worked examples

Example 1

A portfolio has strategic weights of 60% global equities, 30% bonds and 10% real estate. Expected returns are 8%, 4% and 6%. What is the expected return of the strategic allocation? A) 6.0%; B) 6.2%; C) 6.6%.

Show the solution

Compute the expected return: 0.60 × 8% = 4.8%.
Add bonds: 0.30 × 4% = 1.2%.
Add real estate: 0.10 × 6% = 0.6%.
Sum: 4.8% + 1.2% + 0.6% = 6.6%.

Answer: C. The expected return is 6.6%. Risk and constraints must still be checked against the IPS.

Example 2

An investor's strategic weight for equities is 50%. Because the manager expects equities to outperform over the next six months, she holds 58% in equities. Which statement is correct? A) This is a strategic decision and the new strategic weight is 58%; B) This is a tactical decision with an active weight of +8%; C) This is rebalancing back to target.

Show the solution

The target weight of 50% comes from the IPS and long-run expectations, so it is strategic.
The move to 58% is driven by a short-term view over six months, so it is tactical.
Active weight = actual − strategic = 58% − 50% = +8%.
Option A is wrong because the long-term target has not changed. Option C is wrong because rebalancing moves toward the target, not away.

Answer: B. It is a tactical deviation with an active weight of +8% in equities.

Exam tips

Look for time-frame words. 'Long term', 'IPS' and 'objectives' point to strategic. 'Short term' and 'market views' point to tactical.
Remember the asset class selection criteria; questions often ask which set of asset classes is acceptable or which criterion is violated.
In numerical questions, a weighted average of expected returns is usually enough. Check that weights sum to 100% before computing.
When the IPS is given, test each option against return objective, risk tolerance and constraints in that order.

Practice questions from Basics of Portfolio Planning and Construction

Strategic Asset Allocation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Strategic Asset Allocation: frequently asked questions

What is the difference between strategic and tactical asset allocation?

Strategic asset allocation sets long-term target weights based on the investor's IPS and long-run capital market expectations. Tactical asset allocation makes short-term deviations from those targets to exploit views on current market conditions. The gap between the two is the active weight.

How do you determine strategic asset allocation?

Start with the IPS to get the return objective, risk tolerance, horizon and constraints. Add long-term capital market expectations for return, risk and correlation. Then choose target weights that meet the return objective within the risk limit and the constraints.

What are the criteria for selecting asset classes?

Assets within a class should be similar, and classes should be different from each other. The set should be diversifying, mutually exclusive and investable at the size you need. Together they should be able to meet the investor's return objective.

How often should strategic asset allocation change?

Not often. You revisit it when the investor's circumstances change or when long-run capital market expectations change materially. Normal market drift is managed by rebalancing to the existing targets.