86. Basics of Portfolio Planning and Construction Flashcards
Investment policy statement
- Investor’s goals in terms of risk and return
- Investor expectations in compatibility with tolerance for risk
Components of IPS
- Client description
- Purpose, Duties, Responsibilities
- Procedures to update IPS
- Investment objectives, constraints, guidelines
- Evaluation of performance
Absolute risk objective
- Nominal terms: Overall return of at least 6% per year
- Real terms: 3% more than the annual inflation rate
Relative risk objective
Related to a specific benchmark
- Returns not less than 12-month euro LIBOR
Ability vs Willingness to bear Risk
Ability: Depends on financial circumstances
Willingness: Investor’s attitudes and beliefs decide
R R T T L L U
Important points for portfolio construction
- Risk
- Return
- Time horizon
- Tax situation
- Liquidity
- Legal Restrictions
- Unique constraints
Liquidity
Ability to turn assets into spendable cash
Time horizon
Longer the horizon, more risk and less liquidity
Tax situation
Tax treatment of of various types of investment accounts
Legal and regulatory
Regulations may apply to specific types of investors
Strategic Asset Allocation
Specifies percentage allocation of included asset classes
Approaches to ESG Considerations
- Negative screening: Excluding companies based on ESG
- Positive screening: Including -
- Thematic investing: Selecting themes that are ESG friendly
- Impact investing: Invest in positive ESG practicies
- Engagement / active ownership: Share of ownership to improve ESG practicies
Risk budgeting
Setting overall risk limit for portfolio and budgeting permitted risk
Core-satellite approach
Invests majority in passively managed indexed and invests smaller amounts in active strategies
Objective of Risk Portfolio
Increase correlation within asset class
Decrease correlation between asset classes
