Answer: approximate the relevant investable universe.

## Explanation When forming asset classes for strategic asset allocation, the defined asset classes should **approximate the relevant investable universe**. This is because: 1. **Completeness**: Asset classes should cover the entire investable universe available to investors, ensuring that all potential investment opportunities are represented in the strategic asset allocation framework. 2. **Mutual Exclusivity**: Assets should be assigned to only one asset class to avoid double-counting and ensure clear allocation decisions. 3. **Homogeneity**: Assets within the same asset class should have similar risk and return characteristics. Let's analyze why the other options are incorrect: **Option B: have high pairwise correlations between them.** - This is incorrect because asset classes should ideally have **low correlations** with each other to provide diversification benefits. High correlations between asset classes would reduce the diversification effect in a portfolio. **Option C: contain negatively correlated assets within each asset class.** - This is incorrect because assets within the same asset class should be **positively correlated** with each other. If assets within an asset class were negatively correlated, they would cancel each other out, defeating the purpose of having distinct asset classes with homogeneous characteristics. **Key Principles for Asset Class Formation:** - **Completeness**: Cover the entire investable universe - **Mutual Exclusivity**: No overlap between asset classes - **Homogeneity**: Similar assets within each class - **Diversification**: Low correlations between different asset classes - **Risk characteristics**: Different risk-return profiles across asset classes Therefore, the correct answer is **A** - asset classes should approximate the relevant investable universe to ensure comprehensive coverage of investment opportunities in the strategic asset allocation process.

Author: LeetQuiz .