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A hedge-fund manager based in Dubai overweights the media sector stocks as compared to the medical sector stocks from the Dubai Index. This process of overweighting a specific asset class or sector is most likely referred to as:
- A. tactical asset allocation.
- B. strategic asset allocation.
- C. securities selection.
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The correct answer is C.
Securities selection is the process of determining which financial securities are included in a specific portfolio. Therefore, the process of overweighting/underweighting a specific asset class or the process of deviating from index weights of specific individual securities within an asset class is known as securities selection.
Option A is incorrect. Tactical asset allocation is a dynamic investment strategy that actively adjusts a portfolio’s asset allocation.
Option B is incorrect. Strategic asset allocation refers to setting target allocations for various asset classes and rebalancing periodically.
Note: It can sometimes be confusing to differentiate between strategic asset allocation and securities selection. However, remember that strategic asset allocation involves the rebalancing of the different asset classes we have previously chosen, whereas securities selection is simply the process of selecting the securities.
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