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    FinQuiz - Smart Summary - Study Session 12 - Reading 44

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    FinQuiz - Smart Summary - Study Session 12 - Reading 44

    Uploaded by

    Rafael
    155 views2 pages
    Smart Summaries

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    FinQuiz - Smart Summary_ Study Session 12_ Reading 44

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    Smart Summaries

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    155 views2 pages

    FinQuiz - Smart Summary - Study Session 12 - Reading 44

    Uploaded by

    Rafael
    Smart Summaries

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    2015, Study Session # 12, Reading # 44

    BASICS OF PORTFOLIO PLANNING AND CONSTRUCTION


    44.a
     Understanding of clients needs, circumstances & constraints are essential to
    produce good results.
     IPS begin with investors risk / return goals (mutually exclusive & must be
    consistent).

    44.b
     Major components of IPS typically address;
     Description of client & statement of purpose of IPS.
     Statement of duties & responsibilities of manager, custodian & client.
     Procedures of IPS update & investment guidelines.
     Investment objectives & constraints.
     Evaluation of performance & appendices.
     IPS should contain clear statement of circumstances, constraints & benchmark.

    44.c

    Investment objective

    Risk objective

    Absolute Risk

    Return objective

    Relative Risk

     For example not to  in


    portfolio value by more
    than 2% at any point
    over any 12-month
    period.
     Also stated in terms of
    probability of specific
    portfolio results (either
    % losses or $ losses).

    Absolute Return

    Relative to specific
    benchmark.

    44.d

    Can be stated in real (e.g.


    3% > than annual inflation
    rate) or nominal (e.g.
    overall return of at least
    6%) terms.

    Relative Return
     Relative to benchmark.
     Bank relative to cost
    of funds.
     May be relative to
    return on peer groups
    portfolios.

    Risk

    Ability to Bear Risk


     Based on financial circumstances other objective factors.
      Investment horizon, greater assets v/s liabilities, higher
    expected income, greater ability to bear investment risk.

    Willingness to Bear Risk


     Based on investors attitude & beliefs.
     Willingness is quite subjective & can be assessed
    through a short questionnaire.

     If ability & willingness is consistent, no problem in selecting appropriate level of risk.


     If willingness is above average, ability is below average low ability will prevail in
    advisors assessment.
     If ability is above average, willingness is below average advisor may attempt to educate
    client.
     Approach will most likely conform to lower of investors ability or willingness to bear risk.

    Copyright FinQuiz.com. All rights reserved.

    2015, Study Session # 12, Reading # 44

    44.e

    Investment Constraints

    Liquidity

    Tax Situations

    Time horizon

     Ability to turn investments into cash


    without significant price concessions.
     Property & casualty insurance
    significant liquidity required
    (unpredictable claims). Hedge funds &
    private equity funds are not suitable
    investments.

     Overall tax rate as well as tax


    treatment of various accounts is a
    consideration.
     Expected after tax return in relation to
    risk should be focused.

     Generally longer the horizon, more risk


    & less liquidity the investor can accept.

    Legal & Regulatory

    Unique Circumstances

     Constrain how portfolio funds are


    invested.

     Specific preferences or restrictions


    (ethical, religious & diversification
    needs).

    44.f

     Strategic asset allocation % allocation to IPS-permissable asset classes.


     Correlation of return within asset class should be high & between asset
    classes should be low (risk reduction)
     Recently, alternative investments have gained prominence as an investable
    asset class.
     Asset classes, being mutually exclusive, should approximate the universe of
    permissible investments specified in IPS.
     Once asset classes have been specified, then return, standard deviation &
    correlation for each asset class with other classes is determined.

    44.g

     Through efficient frontier, manager identifies portfolio which best meet


    risk / return requirement of investor.
     Tactical asset allocation variation from strategic asset allocation weights
    to take advantage of short term opportunities.
     Security selection deviation from index weights on individual securities.
     Risk budgeting set an overall risk limit & then allocate risk b/w strategic,
    tactical & security selection.
     Success of security selection & tactical asset allocation depends on
    managers skills & informational efficiency of markets.

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