Question

1. Compare the asset allocation strategy and security selection strategy in the Investments. Compare the active security selection Investment strategy and the passive security selection Investment strategy?   (250 words limit)
   

Answer 1

Asset allocation is a strategy to determines the mix of assets in a portfolio for making the portfolio an optimal risk-return balanced one. Asset allocation is done on the basis of the risk profile of the investors and objectives of the investment. After the asset allocation strategy, the individual securities for the portfolio are to be identified. This process is called security selection. Asset allocation helps to include non-correlating assets in the portfolio to minimize the risk and to maximize returns. Most investors prefer mutual funds, index funds, exchange-traded funds etc during the asset allocation strategy.

In passive security selection, the investors prefer low-cost index funds that help to recreate the composition of a stock index.

The active investors seek opportunities in the market to outperform the indexes. So, in an active security selection they will choose the securities among actively managed funds.