Discussion in 'P2.T8. Investment Management (15%)' started by shanlane, Apr 24, 2012.

  1. shanlane

    shanlane Active Member


    The jargon in the risk budgeting for pension risk section is very strange. The author uses the terms strategic asset allocation and tactical asset allocation in a way that does not match up with any definitions I have seen. From what I understand, SAA is more along the lines of passive management and TAA is more along the lines of market timing or playing a hot sector.

    The author seems to use it in a way that does not seem to match this:

    1. Implementation risk is the risk that the TAA might underperform its SAA.

    What in the world does this mean?


    2. Active risk is the amount by which the actual assets could underperform its TAA.


    3. Active risk per manager is the amount by which the manager might underperform their benchmark within the TAA.

    If you could please help to clear up the jargon from this section I know it will make a lot more sense.


  2. ibrahim-1987

    ibrahim-1987 Active Member

    hi shannon,

    SAA: is not about passive management, it is more about distributing assets to acheive a strategic return that consistent with the risk taken.
    example: imagine a CEO tells his treasurer " take this 100 m and invest it in equities only " or " in bonds & options " and i want % 4 as a return, and yr permissible VaR is 5 m, or beta is 1, or duration is .40 or delta is .5,".

    TAA: is about, how the manager will choose his portoflio components & weights to achieve that return with that risk.
    example " if he is alloweded only to invest in equity, then he has the choice of which stock to invest in, & how much to invest (weight). " ect.

    i hope this help.
  3. shanlane

    shanlane Active Member

    Thanks. That makes perfect sense, but it still does not get to the heart of exactly how the author is using these terms.

    Take my second example from above:

    "Active risk is the amount by which the actual assets could underperform its TAA."

    How can the actual perfomance of the assets underperform the TAA if the choice of actual securities IS the TAA?

    Any thoughts are welcome and appreciated.


  4. ibrahim-1987

    ibrahim-1987 Active Member

    If taa, for example: 40% in equities & 60 % in bonds ( or choose any combination ).
    And using this TAA , expected return is for example is 6%.

    The the manager has the choice in which stocks to invest in, no mre than 40%
    and which bonds to invest in, no more than 60%.

    If the manager choose stocks( a, b, c) and bonds( T-bill, corporate AA) , and gets a return lower than 6%, then active manager underperform TAA.
  5. shanlane

    shanlane Active Member

    I think this is starting to make sense. So SAA is more along the lines of a goal for an information ratio or Shaprpe ratio, TAA is the "asset allocation" (% equities, % fixed income, etc), then we have sectors choices within our TAA and the actual securities chosen are the final step.

    How is that?


  6. ibrahim-1987

    ibrahim-1987 Active Member

    Exactly, but the final step as y called it is active manager.
  7. shanlane

    shanlane Active Member




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