Investment Policy

Question 1

Strategic Asset Allocation

Answer 1

• an investment strategy based on MPT and the benefits of diversification -periodic rebalancing is necessary to ensure asset
• SAA requires an investor to show patience when bear markets persist and resist the temptation to sell assets declining in value.

Question 2

Correlation Effects

Answer 2

• The amount of possible risk reduction through diversification depends on the correlation.
• The risk reduction potential increases as the correlation approaches -1.
–If r = +1.0, no risk reduction is
–If r = 0, σ P may be less than the standard deviation of either component asset.
–If r = -1.0, a riskless hedge is possible.

Question 3

Reducing Portfolio Risk

Answer 3

While standard deviation is a measure of total (or overall) risk and a helpful metric to be sure; we’re primarily looking for low correlations between assets and between any single asset to the portfolio to lower the overall “portfolio risk” when considering adding any new asset or investment to a portfolio.

Question 4

Dynamic Asset Allocation

Answer 4

DAA offers more opportunity for risk management than SAA and a more tightly defined methodology compared to TAA

Question 5

Total Return (strategy)

Answer 5

• Also called “absolute return”
• an absolute return strategy is one that employs multiple strategies (e.g., long/short, leverage, arbitrage, etc.) in order to achieve positive returns in the entire portfolio on a regular (e.g., annual) basis

Question 6

Investment Policy Statement (IPS)

Answer 6

Specifics regarding asset allocation, risk tolerance and parameters, time horizon, cash flow needs and liquidity are typically clarified in the IPS.

Question 7

components of an investment policy statement (IPS) including:

Answer 7

• Fund objectives
• Allowable asset classes
• Target asset allocation and benchmarks
• Risk metrics and constraints
• Special restrictions and tax concerns
• Rebalancing protocol
The Role of Capital Market Expectations: Obviously, these are important for those using tactical strategies, but they are important in a strategic framework too, as they create a foundation for expectations going forward.

Question 8

IRD (Income in Respect of a Decedent)

Answer 8

• IRD refers to income that a deceased person had a right to receive during life, but which was not received until after death.

Question 9

The Employee Retirement Income Security Act (ERISA)

Answer 9

The Employee Retirement Income Security Act, passed in 1974, established law and guidelines for pension plans, fiduciaries and investment managers as they relate to managing retirement and pension assets
benefit accrual and funding.
1. Plans must provide participants with regular and automatic communication regarding funding and features.
2. Sets minimum standards for participation, vesting, benefit accrual and funding.
3. Requires accountability of plan fiduciaries.
4. Grants participants the right to sue for breaches of fiduciary duty.
5. Guarantees payment if a defined benefit (DB) plan is terminated through the PBGC.
6. Protects the plan from mismanagement and misuse of asset through fiduciary provisions.

Question 10

Uniform Prudent Investor Act (UPIA)

Answer 10

• The Uniform Prudent Investor Act updated trust investment law with several changes including a new standard for
prudence in the context of the entire portfolio, not just individual issues
• These new standards made it possible manage funds legally using tenants from MPT such as diversification (into assets such as derivatives, commodities, and futures)
• The new standards also allowed trustees to delegate investment management functions

Question 11

Uniform Principal and Income Act (UPAIA)

Answer 11

• Ensures protection of creator’s and decedent’s rights by establishing procedures by which trustees and estate administrators must allocate receipts and payments of principal and income
• Defines “fair and reasonable” distributions “fair and reasonable” distributions

Question 12

Uniform Prudent Management of Institutional Funds (UPMIFA)

Answer 12

• A uniform act, adopted by 49 states (as of 2012) that provides guidance on investment management and endowment expenses for nonprofit and charitable organizations
• A significant revision per this act allows the fund to determine a spending policy that will preserve capital of the fund over the long term, as opposed to limiting spending with regard to “historic dollar value”