ESG-Investing Exam Dumps | A challenge to ESG integration at the asset allocation level when using mean-variance optimization is

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Question 66

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Question 66/136

A challenge to ESG integration at the asset allocation level when using mean-variance optimization is that it:

A. is highly sensitive to baseline assumptions

B. requires specialist knowledge to make informed judgments about future risk

C. could introduce an additional source of estimation errors due to the need for dynamic rebalancing

Correct Answer: A

A challenge to ESG integration at the asset allocation level when using mean-variance optimization is that it is highly sensitive to baseline assumptions.
* Baseline Assumptions: Mean-variance optimization relies on assumptions about expected returns, volatilities, and correlations among assets. Small changes in these inputs can lead to significantly different asset allocation outcomes.
* Estimation Risk: The sensitivity to assumptions increases the risk of estimation errors, which can result in suboptimal asset allocation decisions and increased portfolio risk.
* ESG Data Integration: Integrating ESG factors adds another layer of complexity, as ESG data can be inconsistent or incomplete, further complicating the optimization process.
CFA ESG Investing References:
The CFA Institute's materials on portfolio management and asset allocation discuss the challenges of mean-variance optimization, including its sensitivity to baseline assumptions and the difficulties in integrating qualitative ESG data into quantitative models.

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