Explain the difference between strategic asset allocation and tactical asset allocation.

• A. Strategic asset allocation sets long‑term target mix; tactical asset allocation makes short‑term deviations within risk limits to capitalize on opportunities.
• B. Tactical asset allocation sets long-term target mix; strategic deviations short-term to capitalize on opportunities.
• C. Both strategies set long-term target mix; no deviations.
• D. Strategic deviation is allowed within risk limits for opportunities.

Answer: (A)

Strategic asset allocation sets a long-term target mix that reflects the investor’s goals, risk tolerance, and time horizon, and it relies on disciplined rebalancing to stay near that target over time. This provides a stable, diversified foundation and discourages knee-jerk changes based on short-term market moves.

Tactical asset allocation, on the other hand, permits short-term deviations from that long-term target when market conditions or valuations create opportunities or pose risks. These tilts are intentional and bounded by predefined risk limits, with the aim of potentially enhancing returns or reducing risk in the near term while the overall plan remains intact. For example, a tactically justified overweight in a particular asset class might be used when it’s undervalued or expected to perform well, with a plan to revert to the strategic target when conditions change.

So the distinction is long-run target planning versus controlled, temporary deviations aimed at taking advantage of near-term opportunities.