Asset Allocation

CFA Level III Portfolio Management
#1

Q1) Hedging portfolio / Return Seeking method: requires the asset portfolio to fully hedge the liability portfolio. But Schweser says you can also partially hedge the portfolio. This is soo confusing.

Q2) The I don’t get the difference between surplus optimization technique and Hedging portfolio / Return Seeking, in both methods we are trying to earn a return on the surplus. Can someone explain how the two methods are different

#2

Surplus optimization seeks to maximze the surplus using a MVO framework while considering for its liabilities. So it is less aggressive and more likely to use fixed income.

Return-seeking creates 2 portfolios. One that is completely used to hedge the liabilities. And then use the surplus as a complete separate entity with the main focus to maximize return. So the approach is more aggressive.

#3

True.