Asset Allocation

Question 1

Investment governance

Answer 1

Ensures that appropriate individuals or groups make informed investment decisions and conduct oversight activities on behalf of investors

Question 2

Objective of effective governance

Answer 2

To match the investor’s objectives with their constraints while ensuring that investment decisions comply with relevant laws and regulations. Investment governance also seeks to improve investment performance by aligning asset allocation with implementation

Question 3

Effective Investment Governance Models

Answer 3

1. Establish long-term and short-term investment objectives
2. Allocate rights and responsibliities within the governance structure
3. Specify processes for creating an investment policy statement (IPS)
4. Specify processes for creating a strategic asset allocation
5. Apply a reporting framework to monitor the investment program’s stated goal and objectives
6. Periodically perform a Governance audit

Question 4

Investment objectives

Answer 4

• The objective for a pension fund is for plan assets to meet current and ongoing plan liabilities
• The objective for an endowment is to achieve a rate of return that exceeds the return required to fund current and ongoing distributions
• The objective for an individual investor is to have sufficient assets for retirement while adhering to constraints and risk preferences

Question 5

A proposed asset allocation will be developed after

Answer 5

1. IPS is constructed
2. Investment results are simulated over the appropriate time horizon(s)
3. The risk and return attributes of all possible asset allocation strategies are considered

Question 6

A Reporting Framework

Answer 6

Allows stakeholders to evaluate performance, investment guideline compliance, and the investment program’s progress toward achieving its stated goals and objective. The framework should outline the current status of the program, where it is in relation to it goals and objectives, and how Management decisions have added or subtracted value.

Question 7

Governance Audit

Answer 7

An independent third party should audit the effectiveness of the governance structure, policies, and procedures. The auditor examines governing documents, determines the organization’s capacity to effectively execute decisions based on those documents, and reviews portfolio efficiency given any governance constraints.

Question 9

Decision-Reversal Risk

Answer 9

is the risk of reversing investment decisions at the worst possible time (I.e., creating the maximum loss) Some ways to mitigate decision reversal risk include:
* Defining a strategy: Writing out a complete strategy before starting the process
* Governance team: Having a governance team
* Articulating objectives: Articulating the objectives of the investment program
* Allocating decision rights: Allocating decision rights and responsibilities among the functional units
* Establishing a reporting framework: Establishing a reporting framework
* Undertaking governance audits: Undertaking governance audits