Question

The reasons for creating a Strategic Asset Allocation for retail investors based on allocating risk rather than on allocating returns include all of the following, except:

Group of answer choices

A.Historical volatility is a good measure/predictor of future volatility of each asset in the portfolio

B. Risk Parity based SAA are better diversified than equal $ allocated SAA.

C. Creating an SAA based on optimising returns against risk may not allocate to investments that are important in a portfolio

D.Historical returns of each asset in the portfolio is not a good predictor of future returns of each asset in the portfolio

E. Retail investors better understand their desired level of volatility rather than their desired required returns.

Answer 1

The correct answer is

Retail investors better understand their desired level of volatility rather than their desired required returns.

Retail investors do not really understand the desired level of volatility in their portfolio, their expectation is more in line with the expected return.

Historical volatility can be a good measure of future volatility of the asset to a certain extent. Risk parity allocation focuses on allocating asset based on risk so it does a slightly better job. Focusing on expected return you might have to skip certain asset in order to increase the expected return and the risk might go up. Historical return can not be a precise measure of future expected return.