Chapter 5 - The Role of the Investment Manager Flashcards
What is the Investment Management Process?
Determine the investment objectives for the client
Formulate the investment policy and strategies to meet those objectives
Stock (or fund) selection
Performance Measurement
What is Modern Portfolio Theory ?
MPT suggests a systematic procedure of evaluating difference combinations of securities and selecting combinations that provide the optimal reward for given level of risk
What is efficient frontier?
A set of portfolios that offer the maximum rate of return for any given level of risk.
Equity Diversification
Equity diversification should be across the following;
Individual shares
Diversify across markets
Diversify across international markets
What is Strategic Asset Allocation
Portfolio Manager decides what proportion of the total portfolio to invest in broad asset categories like;
Equities
Bonds
Property
What is Tactical Asset Allocation
Involves short-term variation of the asset allocation of the fund to take advantage of market changes of fluctuations.
Active Investment Management
An investment strategy using analysis in an attempt to achieve above-average or superior risk-adjusted returns.
Passive Investment Management
An investment strategy that should not require active intervention but will be self-maintaining. Passive management does not attempt to outperform their underlying market index.
Advantages of Active Management
Informed investment decisions based on experience, judgement and analysis of market trends
Possibility of higher returns than the index against which the portfolio is benchmarked
Can take defensive measures if market downturns
Disadvantages of Active Management
Higher Fees and operating expenses
Analysis might not outperform benchmark index
Investment Style might adversely impact performance and reduce returns.
Advantages of Passive Management
Low cost and low trading costs
Returns in line with index its tracking
No reliance on the ability of an investment manager.
Disadvantages of Passive Management
Performance matches index if its low performance will be low also
Unable to move out of sectors, stocks or hedging on a decline.
