Chapter 16 - The Portfolio Management Process (Done) Flashcards
What is the first step in the portfolio management process?
The first step is to determine the investment objectives and constraints, which involves assessing the client’s required rate of return and their risk tolerance.
What factors should be considered when determining investment objectives?
Factors to consider include the client’s time horizon (e.g., longer time horizons may allow for more equity investments) and their psychological comfort with taking on risk.
What is an investment policy statement (IPS)?
An IPS is an agreement between a portfolio manager and a client that provides investment guidelines, including operating rules, asset allocation, investment objectives and constraints, and a schedule for portfolio reviews.
What types of assets are considered when developing the asset mix?
The asset mix includes cash and cash equivalents, fixed income securities, and equity securities.
What is asset class timing?
Asset class timing involves strategically switching between asset classes (e.g., from stocks to bonds) based on the current economic cycle to improve returns.
What is involved in selecting securities for a portfolio?
Selecting securities involves choosing specific stocks, bonds, or managed products that match the client’s investment objectives and constraints.
What does monitoring the client, market, and economy entail?
Monitoring involves staying informed about the client’s objectives and any changes, anticipating market changes to align with client objectives, and tracking economic information that may affect each asset class.
How is portfolio performance evaluated?
Portfolio performance is typically reviewed every six months or annually, comparing the portfolio to similar portfolios or benchmarks, using measures such as total return and risk-adjusted rate of return (e.g., Sharpe ratio).
What is the Sharpe ratio?
The Sharpe ratio is calculated as the return on a portfolio minus the risk-free return, divided by the standard deviation of the portfolio. A higher Sharpe ratio indicates better risk-adjusted returns.
What is the purpose of re-balancing a portfolio?
Re-balancing reallocates assets back to their originally intended portfolio weights to ensure the portfolio aligns with the client’s objectives, especially as certain asset classes (e.g., stocks) may grow faster than others over time.
What are dynamic and tactical asset allocations?
Dynamic asset allocation systematically re-balances the portfolio to maintain long-term targets, while tactical asset allocation allows for capitalizing on investment opportunities based on current economic cycles.
What are the different risk categories in equities?
The risk categories in equities include conservative equities (low risk), growth equities (medium risk), venture equities (high risk and low capitalization), and speculative equities (maximum risk and highly volatile).
What are the three main investment objectives?
The three main investment objectives are safety of principal, regular income, and growth (capital gains).
How does the safety of principal affect investment choices?
Clients prioritizing safety of principal may prefer more secure investments such as short-term bonds, while those prioritizing growth may lean towards equities.
