Quick Answer
Strategic asset allocation sets long-term target weights and rebalances back to them; tactical allocation deliberately deviates to time the market. Styles split active vs. passive, growth vs. value, income vs. appreciation. Techniques include diversification (kills unsystematic risk only), sector rotation, dollar-cost averaging, protective puts, covered calls, collars, and leverage.
The whole unit on one sheet: the allocation strategies, the selection styles, and the risk-and-return techniques the exam loves to contrast.
The One-Liners That Win Points
- Strategic allocation sets long-term target weights (goals, risk tolerance, time horizon) and only changes when the CLIENT changes, not the market.
- Rebalancing sells winners and buys underperformers to return to targets: a natural buy-low, sell-high discipline.
- Tactical allocation deliberately moves AWAY from targets to exploit short-term opportunities (market timing, sector rotation), then returns.
- Buy and hold minimizes transaction costs and capital gains taxes; it does NOT guarantee profit.
- Active management tries to beat a benchmark (higher fees, higher turnover, less tax-efficient); passive replicates it, resting on the Efficient Market Hypothesis (EMH).
- Growth buys above-average earnings growth at high price-to-earnings (P/E) and price-to-book (P/B); value buys below intrinsic value (low P/E, low P/B) with a margin of safety.
- Income investing targets regular cash flow (bonds, preferred stock, dividend payers, real estate investment trusts (REITs)); capital appreciation accepts low income for long-term growth.
- Diversification cuts unsystematic (company-specific) risk but NEVER systematic (market) risk.
- Dollar-cost averaging (DCA) invests a fixed dollar amount at set intervals, buying more shares when prices are low.
Numbers to Lock In
| Item | Value |
|---|---|
| Typical strategic allocation example | 60% stocks, 30% bonds, 10% cash |
| Threshold-based rebalancing trigger example | drift beyond +/- 5% |
| Active management fees | 0.5% to 2% annually |
| Passive management fees | 0.03% to 0.20% annually |
| Diversification risk-reduction point | 15 to 20 stocks across sectors |
| Regulation T initial margin | 50% |
| Maintenance margin (FINRA minimum) | 25% equity |
Active vs. Passive, Growth vs. Value, Income vs. Appreciation
- Active vs. passive: active wins more often in less efficient markets (small-cap, international, emerging); passive tends to win in highly efficient markets (large-cap U.S. stocks). Most active funds underperform their benchmark after fees over the long run.
- Growth vs. value: growth reinvests profits and runs higher volatility; value often pays dividends and is less volatile but requires patience (beware value traps).
- Income vs. appreciation: income suits retirees needing cash flow; appreciation suits long horizons that do not need current income.
Techniques to Know Cold
- Sector rotation: cyclical sectors (technology, consumer discretionary, industrials) lead in expansion; defensive sectors (utilities, healthcare, consumer staples) hold up in contraction.
- Protective put: own stock plus buy put; insurance that limits downside, upside stays open (minus premium).
- Covered call: own stock plus sell call; earns premium income but caps upside and gives NO downside protection.
- Collar: own stock plus buy put plus sell call; caps both sides. A zero-cost collar is when the call premium exactly offsets the put premium.
- Leveraging: margin amplifies gains AND losses equally; margin interest must be overcome before profiting; not for risk-averse or income-oriented investors.
- Volatility management: diversification, hedging with options, low-correlation alternatives (real estate, commodities), volatility-targeting, and low-volatility investing.
Top Gotchas
- Rebalancing is NOT tactical allocation. Rebalancing returns to the original targets; tactical deliberately moves away to chase short-term opportunities.
- Buy and hold does NOT guarantee profit; it just minimizes costs, and the portfolio can still fall.
- Diversification eliminates unsystematic risk, never systematic (market) risk, no matter how many securities you hold.
- Income investing is not value investing: income targets cash flow regardless of price; value targets underpriced stocks that may or may not pay dividends.
- "Defensive" sectors are not defense/military companies: they provide essentials (electricity, medicine, food) and resist economic cycles.
- DCA yields a lower average COST per share than the average PRICE, but it does NOT guarantee a profit; a steadily falling market still loses money, and lump-sum usually beats DCA in a rising market.
- A covered call alone gives no downside protection; it only generates income. A collar limits BOTH upside and downside.
- Regulation T initial margin is 50% (a Federal Reserve rule); the 25% maintenance margin is a FINRA minimum. Different numbers, different regulators; brokers can require more, never less.
One-Breath Recap
Strategic asset allocation sets long-term target weights from the client's goals, risk tolerance, and time horizon, then rebalances back to those targets, while tactical allocation deliberately deviates to time the market before returning. On the style side, active management chases a benchmark while passive replicates it on Efficient Market Hypothesis logic, growth pays a premium for future earnings while value buys a discount to intrinsic value, and income prioritizes cash flow while capital appreciation prioritizes long-term growth. The techniques layer on top: diversification kills unsystematic but never systematic risk, sector rotation rides cyclical versus defensive sectors through the economic cycle, and dollar-cost averaging locks in a lower average cost than average price. Options round it out with the protective put (insurance), covered call (income, capped upside), and collar (both sides capped), while leverage under a 50% Regulation T initial margin magnifies gains and losses alike. Match each tool to the client, remember what none of them guarantee, and this unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Portfolio Management Strategies unit for the complete lesson.