What is the 'Core-Satellite' approach in portfolio asset allocation?

[ A ]Trading high-frequency equity futures during the day and holding cash at night.

[ B ]Investing 100% of capital into space exploration and satellite telecommunication corporate stocks.

[ C ]Allocating 50% to bank savings accounts and 50% to physical real estate.

[ D ]Allocating the major portion of the portfolio (e.g., 70-80%) to low-cost passive index funds or stable core holdings, while surrounding it with smaller active 'satellite' allocations (20-30%) seeking alpha.[ CORRECT ]

Takeaway

The Core-Satellite approach allocates the bulk of a portfolio (roughly 70-80%) to low-cost passive index holdings for stable market-matching returns, while a smaller satellite sleeve (20-30%) pursues active alpha through higher-conviction bets.

Derivation

The 'core' is designed to deliver dependable, low-cost beta exposure that tracks the broad market with minimal tracking error and fees, forming the portfolio's stable foundation. The 'satellite' sleeve is where the investor takes calculated active risk — sector tilts, mid/small-cap picks, thematic funds, or tactical trades — seeking to add alpha on top of the core's market return, without risking the entire portfolio on active-manager skill. This structure is popular because it balances cost efficiency and diversification (from the core) with the potential for outperformance (from the satellite), and the exam tests whether candidates understand which sleeve should dominate the allocation and why.

Why the others fail

A — Trading high-frequency equity futures during the day and holding cash at night.

Day-trading equity futures intraday is short-term speculative trading activity, entirely unrelated to the long-term structural core-satellite asset allocation framework.

B — Investing 100% of capital into space exploration and satellite telecommunication corporate stocks.

'Satellite' in this context refers to smaller active portfolio allocations, not a literal sector bet on space or telecom stocks — the term is a structural metaphor, not an industry theme.

C — Allocating 50% to bank savings accounts and 50% to physical real estate.

A flat 50:50 split between savings accounts and real estate is a simple two-asset allocation; it lacks the passive-core-plus-active-satellite structure that defines this strategy.