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

Which feature most likely distinguishes a liability-relative strategic asset allocation from an asset-only approach?

A liability-relative approach most likely sets the allocation by considering how assets behave relative to the investor's liabilities, for example matching their interest rate sensitivity. An asset-only approach focuses on asset risk and return alone, though both approaches still consider risk tolerance.

  1. AIt ignores the investor's risk tolerance
  2. BIt models asset choices relative to the characteristics of the investor's liabilitiesCorrect
  3. CIt uses only historical returns

Explanation

A liability-relative approach selects assets based on how they behave against the liabilities, such as hedging interest rate sensitivity. Risk tolerance still matters, and the use of historical data is not what defines the approach.

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