Overview of Asset Allocation (2025 Level III CFA® Exam – Reading 4)

Master Reading 4 of the CFA® Level III curriculum with Professor James Forjan. This lesson explains why asset allocation is the most important decision in the investment process and shows how strong investment governance and a clear Investment Policy Statement (IPS) drive better portfolios. You’ll learn how to build a strategic asset mix, model an economic balance sheet (including human capital), and manage risk and rebalancing—without getting lost in formulas.

What you’ll learn

Elements of effective investment governance & IPS
Strategic vs tactical/dynamic asset allocation
Economic balance sheet: extended assets & liabilities
Asset-only, liability-relative, and goals-based approaches
Risk budgeting, constraints, monitoring, and rebalancing best practices

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Topic 2 – Asset Allocation and Related Decisions in Portfolio Management
Reading 4 – Overview of Asset Allocation
LOS : Describe elements of effective investment governance and investment governance considerations in asset allocation.
LOS : Formulate an economic balance sheet for a client and interpret its implications for asset allocation.
LOS : Compare the investment objectives of asset-only, liability-relative, and goals based asset allocation approaches.
LOS : Contrast concepts of risk relevant to asset-only, liability-relative, and goals based asset allocation approaches.
LOS : Explain how asset classes are used to represent exposures to systematic risk and discuss criteria for asset class specification.
LOS : Explain the use of risk factors in asset allocation and their relation to traditional asset class-based approaches.
LOS : Recommend and justify an asset allocation based on an investor’s objectives and constraints.
LOS : Describe the use of the global market portfolio as a baseline portfolio in asset allocation.
LOS : Discuss strategic implementation choices in asset allocation, including passive/active choices and vehicles for implementing passive and active mandates.
LOS : Discuss strategic considerations in rebalancing asset allocations.

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