1. InvPortf. Management Process

Question 1

Components of Required Rate of Return

Answer 1

1. Real risk free rate: based on zero inflation and zero uncertainty
2. Inflation protection: nominal risk-free rate, based on expected inflation
3. Risk premium: compensation for bearing risk

Question 2

Accumulation Phase

Answer 2

• accumulation of net worth to satisfy short-term needs (house, car) and long-term goals (retirement)
• willing to invest in MODERATELY HIGH-RISK investments in order to achieve ABOVE-AVERAGE rates of return

Question 3

Consolidation Phase

Answer 3

-has paid off many outstanding debts and typically has earnings that exceed expenses
becoming more concerned with long-term needs of retirement
-willing to accept MODERATE PORTFOLIO RISK, not willing to jeopardise “nest egg”

Question 4

Spending Phase

Answer 4

• typically retired or semi-retired
• wishes to protect the nominal value of his/her savings
• at some time, must make more investments to PROTECT FROM INFLATION

Question 5

Gifting Phase

Answer 5

• often concurrent with spending phase
• believes the portfolio will cover expenses and uncertainties
• if he/she believes there are excess amounts in the portfolio, may make ‘gifts’ to family/friends/charities

Question 6

Before constructing investment policy statement, what are the investment objectives that the planner must establish?

Answer 6

1. Capital preservation: maintain purchasing power
2. Capital appreciation: more risk, portfolio growth through gains
3. Current income: generate income rather than gains
4. Total return: combine income with gains

Question 7

What are the constraints the planner must establish? (5)

Answer 7

1. Time horizon
2. Liquidity needs
3. Tax considerations
4. Legal/regulatory
5. Unique needs/preferences

Question 8

The Portfolio Management Process

Answer 8

1. POLICY STATEMENT - Focus: short- and long-term needs, familiarity with capital market history, expectations
2. EXAMINE CURRENT AND PROJECT FINANCIAL, ECONOMIC, POLITICAL AND SOCIAL CONDITIONS - focus: short- and intermediate-term expected conditions to use in constructing a specific portfolio
3. IMPLEMENT THE PLAN, CONSTRUCT PORTFOLIO - focus: meet the investor’s needs at the minimum risk levels
4. FEEDBACK LOOP - monitor and update investor needs, environmental conditions, portfolio performance