Least Likely Correct Statement on Asset Allocation by William Moore

B

B. Asset allocation is the process of selecting specific securities to include in the portfolio.

Explanation: In the context of investment portfolios, asset allocation refers to the strategic distribution of investments across different asset classes such as stocks, bonds, cash, real estate, and alternative investments. William Moore is explaining the attributes and importance of asset allocation to a group of wealthy individual investors. Among the statements provided, the least likely correct statement is option B, which states that asset allocation is the process of selecting specific securities to include in the portfolio.

Option A, "Asset allocation involves assigning policy weights to relevant asset classes," is a correct statement. Asset allocation involves determining the target weights or percentages for each asset class in the portfolio. These policy weights are set based on factors such as the investor's risk tolerance, investment objectives, time horizon, and market expectations.

Option C, "85-95% of a typical portfolio's return can be explained by the target asset allocation," is also a correct statement. Research has shown that asset allocation is one of the most significant determinants of a portfolio's performance. Studies like the Brinson, Hood, and Beebower study have indicated that the strategic asset allocation decision explains a significant portion of a portfolio's return. The specific percentages mentioned in the statement may vary, but the general idea that asset allocation plays a crucial role in portfolio returns is widely accepted.

However, option B is incorrect. Asset allocation is not about selecting specific securities to include in the portfolio. That process falls under the domain of security selection, which is a separate step in portfolio construction. Asset allocation focuses on determining the overall allocation of funds across broad asset classes rather than picking individual securities.

Therefore, option B is the least likely correct statement among the three options provided.