The steps in the asset allocation process are:
- Determine the investor's risk, return, and constraints.
- Formulate long-term capital market expectations.
- Determine the mix of assets (allocation) that best meets the objectives of the IPS.
- Monitor the portfolio.
- Adjust the portfolio as necessary for strategic or tactical asset allocation.
Strategic asset allocation is the first step in the portfolio construction process which is step 3 above. Tactical asset allocation is the subsequent deviation from the strategic asset allocation based on short-term capital market expectations. Capital market expectations are used for the generation of the efficient frontier used in step 2 above which occurs before the portfolio construction takes place.
