Williams should agree with Statement 1. Even though investment managers are “experts” at selecting good investments, investment managers need discipline in the search for reward versus systematic risk. A clearly defined asset allocation provides such discipline by ensuring that the investor’s portfolio accurately reflects the investor’s desires with respect to risk and return. Williams should disagree with Statement 2. It is true that over the long run, asset classes do respond somewhat homogenously to systematic (macroeconomic) risk factors, however, this supports the conclusions drawn by empirical studies that strategic asset allocation tends to explain the majority of the variability in portfolio returns. This is because the asset class selected (not necessarily the security or timing) will tend to dictate the response of the portfolio to changes in interest rates or other macro economic factors. |
