Chapter 6 Flashcards
Traditional portfolio construction
Cash - including MM for liquidity
Bonds - income generation
Equities - growth element
Investment objectives
It need to be knows what a clients requirement for income or capital growth is so you properly allocate assets within the portfolio. Also the use of wrappers will need to be considered.
Time horizon
The accessibility of the investment form the clients side will effect the assets invested in.
Attitude to risk (ATR) and Capacity for loss (CFL)
ATR is a vital part of the investment discussion process. This app an be assurtained using software or questions. However
ATR can be differ from CFL as CFL is objective measure to describe whether the client will have the funds to live should the investment struggle.
Asset allocation
This is the division of an investment portfolio into different asset classes. This is done to spread Rick and increase chances of growth during economical events and cycles.
Modern portfolio theory (MPT)
Is a theory that tries to maximise returns while minimising risk by carefully choosing different asset classes.
This theory assumes that investors are risk averse meaning given two assets with the same performance they will always choose the less Risky one.
Deterministic and stochastic modelling
These are the two main approaches to portfolio management
D = involves taking a single input and assuming this will remain constant over a period of time. Ie no randomness
S = this uses many random variables to model thousands of possibilities for the investment return.
Risk rating should be based on
Time frame
Income growth required
Attitude to risk
Amount invested.
Strategic asset allocation (SAA)
This is where portfolio mix is taken on a long term plan and objectives. Five years usually.
Tactile asset allocation (TAA)
This is where you might make small changes to the portfolio with short term growth in mind that is tactically based. This adds a flexibility to the portfolio managers decisions
Investment theories and portfolio construction
Three main:
Efficient market hypothesis = which believes all information is public and availed so the price reflects this
Modern portfolio theory = this is about having an efficient portfolio that yields the highest return
Capital asset pricing model = used to calculate a security required rate of return given the systematic risk evolved.
Diversification and correlation
Correlation is how two assets move in the same way or not
Diversification is about having different assets without similar correlation to protect against risk.
Asset class correlation
Assets with similar characteristics can be classed together. These classes can be separated using:
Historic level of return
Historic level of risk
Level of correlation between investment returns and each asset class.
Impacts of costs effecting investors
Short term investors want cheap funds however expensive at the start funds work better for longer investors where expensive running costs are not ideal for them.
Reduction in yield
This is an industry standard measure on the impact of total charges has on the return during investment.
One limitation of this is it assumes the performance of the fund which is not always accurate.
