Course 1 to 4 Flashcards
What is the bias of the arithmetic average?
It is biased upward when measuring an asset’s long-term performance
What are the 3 steps of the portfolio management process?
1) Planning, 2) execution, 3) monitoring
What is the planning step of the portfolio management process?
You identify the clients’ needs (definition of the IPS)
What is the execution step of the portfolio management process?
You determine the SAA and the strategy choice (active or passive). You end with the portfolio construction
What is the monitoring step of the portfolio management process?
you monitor the portfolio and do portfolio rebalancing while making performance evaluation and reports.
What are the benefits for the client of an IPS?
- It identifies and document the investment objectives and constraints for the client.
- Developping the IPS is an educational experience for the client
What are the benefits of the IPS for the adviser/manager?
- It helps to get to know the licent
- It helps for the guidance for decision making and the resolution of disputes.
- It supports the manager’s investment decisions
What are the components of the IPS?
1) Introduction
2) Statement of purpose
3) Statement of duties & responsabilities
4) Investment Procedures
5) Investment objectives
6) Investment constraints
7) Investment guidelines
8) Evaluation & review
9) Appendices
What is the 2 ways to state the return objective?
- Quantitatively: absolute or relative % return (mostly used by institutional investors.
- general goals: expressed really general and is mostly for 2 central objectives (capital preservation, income generation, and capital appreciation)
What do you need to evaluate global risk tolerance?
- Relative wealth: Is the investor gaining or losing wealth (net saver or net spender)
- Human capital: it is a measure of future earning power, if someone has more human capital, he will be much more comfortable taking more risks.
- Capacity to take risk: Depending on relative wealth, human capital, time horizon and other factors
- Willingness to take risk: more subjective and based on client psychology
What is the different level of global risk tolerance?
- Willingess below average and ability below average = below average risk tolerance
- Willingness above and capacity above = above-average risk tolerance
- Other case = we need further research
What are the 5 investment constraints?
- Liquidity needs: immediate use of funds or other type of needs in the future
- Time horizon: how long does the investor want to invest
- Regulatory: few for individual but more for institutional.
- Fiscal: tax status, tax treatment depending on account type (TFSA, RRSP, etc.)
- Unique needs: special conditions like ESG or things like that.
What are the 2 type of investor by barnewall?
- Passive: lower risk tolerance, mostly professionals, they patiently save or slowly accumulate
- Active: High risk tolerance, mostly executive, they inherit and patiently save.
What are the 5 type of investor by baillard?
- Individuals: makes own decisions but seeks rational advice, they are easy to advise.
- Adventurer: they take cahnces, make own decisions and they are hard to work with.
- Guardian: they protexts the portfolio and seeks advice
- Celebrity: they seeks attention, they have opinions and they may consider advice
- Straight arrow: a balanced mix of everything
How do you find the 5 type of investor by baillard?
- high risk tolerance and impetuous = adventurer
- high risk tolerance and careful = individualist
- Careful and low risk tolerance = guardian
- low risk tolerance and impetuous = celebrity
What are the 4 type of investor according to CFA?
- risk averse and decision based on thinking = methodical
- Risk averse and decision based on feeling = cautious
- less risk averse and decision based on thinking = individualist
- less risk averse and decision based on feeling = spontaneous
What is the purpose of strategic asset allocation (SAA)?
It indicates a long term target allocation for each asset class, with the portfolio being rebalances periodically to maintain the target allocation
What is the purpose of tactical asset allocation (TAA)?
You can overweight or underweight assest class depending on economic outlook and other cators.
What is Beta and Alpha associated to in the IPS process?
- The beta is associated with SAA
- The alpha is associated with TAA
What are defined contribution (DC) pension plans?
It’s an investmenr vehicle in which the amounts investead or the contributions that the employer and the employe make to the plan are defined or specified but the benefits are not.
What are defined benefits (DB) pension plans?
The employer has an obligation to provide benefits to employees when they retire the future benefit is specified or defined.
What are the IPS objective of a DB pension?
- The return objectives ensure the sustainability of the plan there is income generation if necessary.
- The risk tolerance depends on plan status, characteristics of beneficiaries and financial health of the promoter.
What are the IPS constraints of a DB pension?
- Liquidity: net CF of the plan
- Horizon: maturity of the plan, function of the age of the employees, etc.
- Regulatory aspects: aim for prudence and the reduction of conflict of interest
- Fiscal aspects: tax-exempt
- Particular circumstances: contribution for the promoter
What is the fund ratio of a DB pension?
- Fair value of plan assets / PV of DB obligations
- This helps to determine the funded status of the plan
