Principles of Asset Allocation (2025 Level III CFA® Exam – Reading 5)

Master the Principles of Asset Allocation for CFA Level III (Reading 5). In this lesson, Professor James Forjan walks through the big ideas you’re most likely to see on the exam and how to apply them in practice.

What you’ll learn:
Mean–variance optimization and the efficient frontier
Limits of MVO and how to fix them: reverse optimization, Black-Litterman, added constraints
Monte Carlo simulation for multi-period planning
Economic balance sheet, liquidity and illiquid assets
Absolute vs. relative risk budgeting with clear steps
Client needs and preferences turned into portfolio rules
Factor and goals-based investing, liability-relative approaches
Heuristics and rebalancing policy design
Perfect for Level III candidates and practitioners who want a crisp, exam-oriented walkthrough.

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Topic 2 – Asset Allocation and Related Decisions in Portfolio Management
Reading 5 – Principles of Asset Allocation
LOS : Describe and evaluate the use of mean–variance optimization in asset allocation.
LOS : Recommend and justify an asset allocation using mean–variance optimization.
LOS : Interpret and evaluate an asset allocation in relation to an investor’s economic balance sheet.
LOS : Discuss asset class liquidity considerations in asset allocation.
LOS : Explain absolute and relative risk budgets and their use in determining and implementing an asset allocation.
LOS : Describe how client needs and preferences regarding investment risks can be incorporated into asset allocation.
LOS : Discuss the use of Monte Carlo simulation and scenario analysis to evaluate the robustness of an asset allocation.
LOS : Describe the use of investment factors in constructing and analyzing an asset.
LOS : Recommend and justify an asset allocation based on the global market portfolio.
LOS : Describe and evaluate characteristics of liabilities that are relevant to asset allocation.
LOS : Discuss approaches to liability-relative asset allocation.
LOS : Recommend and justify a liability-relative asset allocation.
LOS : Recommend and justify an asset allocation using a goals-based approach.
LOS : Describe and evaluate heuristic and other approaches to asset allocation.
LOS : Discuss factors affecting rebalancing policy.
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