Which type of asset allocation, as described in the NISM Series X-B workbook, uses pre-defined models with triggers based on asset class valuations or portfolio performance, thereby removing the subjective element from allocation decisions?

[ A ]Dynamic Asset Allocation[ CORRECT ]

[ B ]Strategic Asset Allocation

[ C ]Tactical Asset Allocation

[ D ]Fixed Asset Allocation

Takeaway

Option A is correct: Dynamic Asset Allocation uses pre-defined models to allocate assets, with re-allocation triggers defined in terms of asset class valuations or portfolio performance, removing subjectivity from the decision.

Derivation

The workbook describes three types of asset allocation: Strategic (aligned to goals and risk profile, reviewed periodically, not changed based on expected performance), Tactical (based on market-behaviour calls, suitable for seasoned investors with large surpluses), and Dynamic (uses pre-defined models with valuation/performance triggers). A frequent mistake is confusing Tactical with Dynamic, since both react to market conditions, but Tactical is a discretionary call while Dynamic follows a pre-defined, rules-based model.

Why the others fail

B — Strategic Asset Allocation

Strategic Asset Allocation is a long-term plan aligned to financial goals, reviewed periodically for relevance to goals, not driven by valuation or performance triggers.

C — Tactical Asset Allocation

Tactical Asset Allocation is based on calls about likely market behaviour (e.g., going overweight on equities), not pre-defined valuation-based models.

D — Fixed Asset Allocation

The workbook does not describe a 'Fixed Asset Allocation' category; only Strategic, Tactical and Dynamic are discussed.