What is the difference between strategic asset allocation and tactical asset allocation?

• A. Strategic asset allocation sets long-term target weights; tactical allocation adjusts weights in response to short-term market views.
• B. Strategic allocation is rebalanced monthly; tactical is fixed for the year.
• C. Strategic allocation focuses on risk-free assets; tactical uses equities.
• D. Strategic allocation ignores risk; tactical ignores returns.

Answer: (A)

The main distinction is how the portfolio targets are set and adjusted over time. Strategic asset allocation establishes long-run target weights for asset classes based on the investor’s risk tolerance, time horizon, and objectives, creating a baseline diversified mix that is intended to be kept stable with periodic rebalancing. Tactical asset allocation, on the other hand, involves adjusting those weights in the short term in response to market views or opportunities, aiming to add value by tilting the portfolio away from the strategic targets when warranted.

So the correct concept is that strategic sets the long-term targets, while tactical makes short-term deviations from those targets to exploit opportunities. The alternative ideas—such as strategic being rebalanced monthly or fixed for a year, or strategic focusing only on risk-free assets, or tactical ignoring returns—don’t align with how these approaches are used in practice.