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CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction

A sovereign wealth fund must pay out a fixed share of assets each year to the government and has a very long time horizon. When setting its strategic asset allocation, which approach is most appropriate for the fund to take?

The fund should choose an allocation whose expected return covers its spending requirement plus inflation while staying within its risk tolerance. A long horizon permits growth assets, whereas holding only bills would probably not meet the real return need, and performance chasing ignores objectives and constraints.

  1. AHold only short-term government bills to avoid any loss of capital
  2. BChoose an allocation whose expected return covers the spending need plus inflation within acceptable riskCorrect
  3. CSet weights solely on last year's best-performing asset class

Explanation

An asset-only SAA must target a return that funds spending and preserves real value, given the fund's risk tolerance. Bills would likely fail the return requirement over a long horizon, and chasing last year's winner ignores objectives and constraints.

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