Example 5 : Approaches to Asset Allocation

CFA Level III Portfolio Management
#1

Hi,

Can anyone help me understand the explanation reg the question that asks to distinguish between domestic intermediate and long duration fixed income example.

I understood that the interest rate and credit risk are similarities but what factors would distinguish them with respect to aset only and liabilities perspectives

Thanks

#2

Definition of “asset class” could be dependent on type of asset allocation methodology (Asset Only; liability-relative & goal based)

If we’re using Asset-Only, distinction at Fixed Income level may be enough (you could simply allocate to FI, to equity etc).

However, if we’re using Liability-Relative approach, stopping @Fixed Income level is not enough. one has to make the distinction between what types of liabilities are we looking to fund (short duration, long duration), so one needs to go further down from FI-> duration.