(40) Portfolio Management: An Overview Flashcards
LOS 40. a: Describe the portfolio approach to investing.
A diversified portfolio produces reduced risk for a given level of expected return, compared to investing in an individual security. Modern portfolio theory concludes that investors that do not take a portfolio perspective bear risk that is not rewarded with greater expected return.
LOS 40. b: Describe types of investors and distinctive characteristics and needs of each.
LOS 40. c: Describe defined contribution and defined benefit pension plans.
In a defined contribution plan, the employer contributes a certain sum each period to the employee’s retirement account. The employer makes no promise regarding the future value of the plan assets; thus, the employee assumes all of the investment risk.
LOS 40. c: Describe defined contribution and defined benefit pension plans.
In a defined benefit plan, the employer promises to make periodic payments to the employee after retirement. Because the employee’s future benefit is defined, the employer assumes the investment risk.
LOS 40. d: Describe the steps in the portfolio management process.
The three steps in portfolio management process are:
Planning
Execution
Feedback
LOS 40. d: Describe the steps in the portfolio management process. Describe the planning step.
Planning: Determine client needs and circumstances, including the client’s return objectives, risk tolerance, constraints, and preferences. Create, and then periodically review and update, an investment policy statement (IPS) that spells out these needs and circumstances
LOS 40. d: Describe the steps in the portfolio management process. Describe the execution step.
Execution: Construct the client portfolio by determining suitable allocations to various asset classes based on the IPS and on expectations about macroeconomic variables such as inflation, interest rates, and GDP growth (top-down analysis). Identify attractively priced securities within an asset class for client portfolios based on valuation estimates from security analysts (bottom-up analysis).
LOS 40. d: Describe the steps in the portfolio management process. Describe the feedback step.
Feedback: Monitor and rebalance the portfolio to adjust asset class allocations and securities holding in response to market performance. Measure and report performance relative to the performance benchmark specified in the IPS.
LOS 40. e: Describe mutual funds and compare them with other pooled investment products. Describe mutual funds.
Mutual funds combine funds from many investors into a single portfolio that is invested in a specified class of securities or to match a specific index. Many varieties exist, including money market funds, bond funds, stock funds, and balanced (hybrid) funds. Open-ended shares can be bought or sold at the net asset value. Closed-ended funds have a fixed number of shares that trade at a price determined by the market.
LOS 40. e: Describe mutual funds and compare them with other pooled investment products. Describe exchange-traded funds.
Exchange-traded funds are similar to mutual funds, but investors can buy and sell ETF shares in the same way as shares of stock. Management fees are generally low, though trading ETFs results in brokerage costs.
LOS 40. e: Describe mutual funds and compare them with other pooled investment products. Describe separately managed accounts
Separately managed accounts are portfolios managed for individual investors who have substantial assets. In return for an annual fee based on assets, the investor receives personalized investment advice.
LOS 40. e: Describe mutual funds and compare them with other pooled investment products. Describe hedge funds.
Hedge funds are available on accredited investors and are expect from most reporting requirements. Many different hedge fund strategies exist. A typical annual fee structure is 20% of excess performance plus 2% of assets under management.
LOS 40. e: Describe mutual funds and compare them with other pooled investment products. Describe buyout funds.
Buyout funds involve taking a company private by buying all available shares, usually funded by issuing debt. The company is then restructured to increase cash flow. Investors typically exit the investment within three to five years.
LOS 40. e: Describe mutual funds and compare them with other pooled investment products. Describe venture capital funds.
Venture capital funds are similar to buyout funds, except that the companies purchased are in the start-up phase. Venture capital funds, like buyout funds, also provide advice and expertise to the start-ups.
