Asset allocation refers to an investment strategy whose objective is to strike a balance between risk and return through the apportioning of asset portfolio in relations to individual objectives, risk levels and investment horizon. The main asset classes in regards to investment include; equities, cash and fixed incomes, there is no precise asset allocation method which leads to right asset allocation for each an every individual, this leads to the various asset allocation methods (Zimmermann, 2003).
Strategic asset allocation method entails balancing the portfolio to achieve its long term goals of asset allocation, it involves combinations of assets based on expected returns for each class of assets. This method is based on the base policy mix such that in a given scenario if the stocks return rate is 10% and 20% for bonds then the expected return will be 50% of each asset group to give an expected return rate of 15%, computed as follows, (50%*10+50%*20) =15%. These methods aim at balancing the return of a specific asset group (Lee, 2000). Tactical asset allocation method is a strategy that actively adjusts portfolio assets, its objective is to better the risk adjusted returns from an investment,in the long term strategic asset method seems to be rigid therefore it will be necessary to sometimes engage in short term strategies in order to take advantage of unusual investment opportunities that is where the tactical asset allocation comes into place,these method is moderately active and calls for discipline since you must be in a position of identifying short term opportunities and then rebalance the portfolio to long term assets(Aby,1995).Intergrated asset allocation strategy involves moderate management strategy, its mainly used by portfolio managers,mutual funds and investors,it is a complex method compared to both tactical and strategic method,there are no rules, requires good knowledge and analysis tools to facilitate implementation.This method intergrates aspects of all the other asset allocation methods unlike tactical and strategic methods it gives equal weights to future returns and risk in a portfolio,its asset allocation process is similar to both strategic and tactical method at the beginning afterwards the investment preference is changed to get the desired short term and long term portfolio risk and returns.Investors who normally use this approach do invest a fixed portion in high profit investments which are normally associated with high risk and the remaining portion is invested according to the market performances so as to balance between the risk and returns.All these strategies do take into consideration expectations for future market returns.
APA
Reference
Zimmermann, H., Drobetz, W., & Oertmann, P. (2003). Global asset allocation: New methods and applications. Hoboken, N.J: J. Wiley & Sons.
Lee, W. (2000). Theory and methodology of tactical asset allocation. New Hope (Pa.: Frank J. Fabozzi Associates.
Aby, C. D., & Vaughn, D. E. (1995). Asset allocation and financial market timing: Techniques for investment professionals. Westport, Conn: Quorum Books.
