Chapter 16: The Portfolio Management Process Flashcards
Many clients want assurance that their initial capital investment will largely remain intact. We must assess risk tolerance, and sometimes choose to have a lower return in exchange for safer assets
Safety of income
Regular series of cash flows received from debt and equity securities, such as through dividends, interest, or other forms. Investors usually give up some safety in order to have a higher income from their portfolio
Income
Also referred to as capital gains, which is the profit generated when securities are sold for more than they originally cost to purchase. When capital gains are the focus, the emphasis is on security selection and market timing
Growth
Best safety, very steady income, very limited growth
Short-term bonds
very good safety, very steady income, variable growth
long-term bonds
good safety, steady income, variable growth
preferred shares
least safety, variable income, often the most growth
common shares
Cash/cash equivalent with lowest risk, highest quality
Government Issues (<1 year)
Cash/cash equivalent with highest risk, lowest quality
Corporate issues (<1 year)
Fixed income security with low risk and low price volatility
short term (1 - 5 years)
fixed income security with medium risk and medium price volatility
medium term (5-10 years)
fixed income security with high risk and max price volatility
long term (>10 years)
Low risk; high capitalization; predictable earnings; high yield; high dividend payouts; lower price-to-earnings ratio; low price volatility
Conservative investments
Medium risk; average capitalization; potential for above average growth in earnings; aggressive management; lower dividend payout; higher price-to-earnings ratio; potentially higher price volatility
Growth investments
High risk; low capitalization; limited earnings record; no dividends; price-to-earnings ratio of little significance; short operating history; highly volatile
Venture investments
Maximum risk; shorter term; maximum price volatility; no earnings; no dividends; price-to-earnings ratio not significant
Speculative investments
The period spanning the present until the next major change in a client’s circumstances
Time horizon
Refers to the amount of cash in the portfolio. The cash component could be higher or lower depending on the market cycle
Liquidity requirements
The client’s marginal tax rate dictates the proportion of income the client should receive as interest income in relation to dividends. High tax rates can significantly erode the final return on the investments, such as GICs
Tax Requirements
Any investment that contravenes an act, law, bylaw, regulation, or rule is considered a constraint and must be dealt with. This includes insiders and staff of certain companies.
legal and regulatory requirements
Preferences for ethical investing could be constraints on the client’s portfolio, and should be considered
Unique Circumstances
Agreement between a portfolio manager and a client that provides investment guidelines for the manager
investment policy statement
Includes currency, money market securities, redeemable GICs, bonds with maturity of one year or less, and all other cash equivalents. Generally, 5% of a diversified portfolio, risk averse investors may hold up to 10%
Cash
Bonds due in more than one year, strip bonds, mortgage-backed securities, fixed-income exchange-traded funds, bond mutual funds, and preferred shares. Primarily used to produce income, but also provide some safety of principal, or used to generate capital gains.
Fixed income securities
