LOS 6.aPortfolio Management · Asset Allocation
Liability-relative vs asset-only allocation
Difficulty
Candidate-reported: Hard
Exam frequency
High — a Level III asset-allocation anchor
Whether you optimise assets in isolation or relative to liabilities is the first decision in any Level III allocation question — and it is driven entirely by whether the investor has explicit liabilities.
Key points
- Asset-only mean-variance optimisation ignores liabilities; appropriate for investors without defined obligations.
- Liability-relative (surplus) optimisation manages assets − liabilities, the right lens for DB pensions, insurers, and banks.
- Goals-based allocation segments wealth into sub-portfolios by goal and priority — the individual-investor analogue of liability matching.
Common pitfalls
- Recommending asset-only MVO for an investor with explicit liabilities (e.g. a DB plan) — surplus risk, not asset risk, is what matters.
- Treating goals-based and liability-relative as unrelated — both anchor the allocation to obligations rather than to assets alone.
Source: CFA Program Curriculum, Level III — Asset Allocation, Overview of Asset Allocation.