What is the primary objective of strategic asset allocation?

• A. To increase short-term returns
• B. To establish fund's policy risk and target asset class weights
• C. To minimize volatility in the investment portfolio
• D. To focus solely on manager selection

Answer: (B)

The primary objective of strategic asset allocation is to establish a fund's policy risk and target asset class weights. This approach involves determining the appropriate mix of various asset classes—such as equities, fixed income, real estate, and alternatives—to align with the investor's risk tolerance, investment objectives, and time horizon. By defining these target weights for each asset class, strategic asset allocation sets a long-term investment framework that guides investment decisions and allows for a disciplined approach to rebalancing as market conditions change.

This approach contrasts with shorter-term strategies focused on market timing or manager selection since the goal is not predominantly about maximizing immediate returns or minimizing volatility but rather establishing a structured, long-term investment strategy. This ensures that the portfolio remains aligned with the overall investment goals over an extended period, even as individual asset class performances fluctuate.