Chapter 15 - Choosing An Appropriate Investment Strategy

Question 1

Institutional investment objectives

Answer 1

Clearly stated and quantified.

Encompass permitted degree of risk, required return and cashflow timing

Question 2

Risk

Definitions

Answer 2

Probability of default
Expected variability of return
Risk of underperforming compared to competitors
Probability of failing to achieve investors objectives

Question 3

Risk

Risk appetite depend on

Answer 3

Nature of institution
Constraints of governing body and documentation
Legal or statutory controls

Question 4

Factors influencing an institutions investment strategy

Answer 4

1. Nature of existing liabilities
2. Currency of existing liabilities
3. Term of existing liabilities
4. Uncertainty in existing liabilities
5. Tax and expenses
6. Statutory, legal or voluntary restrictions
7. Size of the assets
8. Expected long term return
9. Accounting rules
10. Statutory valuation and solvency requirements
11. Future accrual of liabilities
12. Existing asset portfolio
13. Strategy followed by other funds
14. Institutions risk appetite
15. Institutions objectives
16. Need for diversification
17. ESG considerations

Question 5

Factors influencing an individuals investment strategy

Answer 5

Characteristics of their assets and liabilities and matching cashflows
Risk
Returns form different asset classes
Investment constraints
Practical considerations