CH22 Flashcards
What is the primary goal of individual investors in the investment process?
Balance risk/return throughout life
Wealth shifts from human capital to financial capital with age, increasing portfolio choice importance.
How does the life cycle affect investor risk-return trade-off?
Younger investors are willing to bear more risk for higher returns; older investors are willing to accept lower returns for lower risk.
What is a personal trust in the context of professional investors?
Trustee holds interest in asset for benefit of another person
Management is subject to prudent investor rules.
What are the two types of pension funds?
Defined benefit and defined contribution
Defined benefit depends on tenure and salary; defined contribution benefits depend on investment performance.
What is the role of endowment funds?
Gifts to nonprofits that are invested; funds from endowment used by the nonprofit.
What types of insurance policies are recognized in the context of life insurance companies?
Term insurance and whole-life policies
Whole-life policies combine insurance with savings at a fixed rate.
What is the primary source of funds for banks?
Predominantly deposits, some borrowed funds.
What is liquidity in investment terms?
Speed and ease with which asset can be converted into cash at or near its value.
How does the investment horizon affect portfolio management?
Planned liquidation date affects portfolio risk and security maturity dates.
What is the prudent investor rule?
The fiduciary responsibility of a professional investor.
What are unique needs in investor constraints?
Special considerations related to underlying investors
Financial needs may determine riskiness of portfolio.
What are the components of an investment policy statement?
Objectives, constraints, and asset allocation strategies
Specific components may vary based on investor type.
What are the primary asset classes in asset allocation decisions?
Money market assets, fixed-income securities, stocks, non-U.S. stocks and bonds, real estate, precious metals, alternative assets.
What factors determine choices in asset allocation?
Capital market expectations, risk tolerance, financial needs, tax sheltering.
What is the role of the investment committee in institutional investing?
Comprised of senior management; formulates investment policies and verifies implementation.
What is the difference between active and passive investment strategies?
Active aims for better than average returns; passive aims for average returns.
Fill in the blank: The _______ rule governs the fiduciary responsibility of a professional investor.
[prudent investor]
True or False: Older investors typically seek higher returns with higher risk.
False
What is the significance of monitoring and revising investment portfolios?
Client circumstances can change over time; asset allocation will change over time.
