Question

In: Finance

A fund manager has a long-term asset allocation that includes an exposure of 20% of the...

A fund manager has a long-term asset allocation that includes an exposure of 20% of the portfolio value to international equities. The fund manager makes the decision to include the stock AAPPL in the portfolio. On average, evidence suggests that the long-term asset allocation decision will have a _________ contribution to the overall performance of the portfolio relative to the decision to hold AAPPL as part of the Australian equity exposure.
Select one:
a. Minimal
b. Lower
c. Higher
d. It cannot be decided from the information provided

Solutions

Expert Solution

In the given question the fund manager wishes to allocate 20% of the portfolio to international equities. It also states that AAPPL is a stock which the fund manager has decided to include as part of the Australian equity portfolio. A comparison is to be made between the allocation of 20% of the portfolio to international equities versus the inclusion of AAPPL stock.

In order to judge the long term impact of any asset allocation in a portfolio (minimal, lower or higher), the allocation must be compared from the viewpoints of both risk and return outcomes that may present themselves in the future. A good portfolio allocation increases returns and reduces risk. The allocation's return potential may be assessed when the assets' performance with a benchmark (e.g. the beta). Also, risks need to be minimised in a portfolio for which direction of movement for the two assets against a benchmark is to be studied. For this again, statistical measures such as covariance must be seen.

In the question, no data has been provided for the measuring the possible risk or return outcomes in the long term. Hence the asset allocation's impact on long term portfolio performance cannot be commented upon.

The answer is therefore, d. (It cannot be decided from the information provided)


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