Lesson2: Investment Management Process Flashcards
Phases in Investlemtn Life Cycle
- Accumulation Phase
- Consolidation Phase
- Spending Phase
- Gifting Phase
Phase wherein earnings exceed expenses
Consolidation Phase
The phase wherein one extends provincial assistance to others
Gifting Phase
The phase when living expenses are covered by social security income and income from prior investments
Spending Phase
Phase wherein individals attempt to accumulate assets to satisfy immediate needs or longer-term goals
Accumulation phase
Essential component in a financial plan
Insurance
Helps meet unforseen occasions
Cash Reserve
Portfolio management process
- Policy statement
- Examine current and projected financial, economic, plitical, and other conditions
- Construct a portfolio
- Continual monitoring
A document drafted between a portfolio manager and a client that outlines general rules for the manager. This statement provides the general investment goals and objectives of a client and describes the strategies that the manager should employ to meet these objectives.
Investment Policy Statement (Indirect Investment)
A clear reference frame for investment decisions and it must be based on the investment objectives and risk tolerance of the client.
Investment Policy Statement (Direct Investment)
- Road map to guide future decisions
Investment Policy Statement
Importance of Policy Statement
a. Understand and articulate realistic goals
b. Standards for evaluating Portfolio Performance
c. Imposes discipline
d. Protects an investor
Factors Considered in an Investment Policy Statement
- Risk and Tolerance
- Investment and or return objectives
- Liquidity requirements
- Investment horizon
- Investment strategy and rebalancing
- The portfolio construction process, including asset allocation and security selection
- Investment restrictions
- Investment Performance Review
Factors Considered in an Investment Policy Statement
Scope and Purpose
Governance
Investment, Return, and Risk Objectives
Risk Management
may be stated in terms of an absolute or a relative percentage return or general goal
Investment Objectives
Investment Objectives
- capital preservation
- capital appreciation
- current income
liquidity needs, time horizon, tax factors, legal and regulatory constraints and other unique needs
Investment Constraints
Well-defined, clear, and unambiguous
Specific
with specific criteria that measure progress toward the accomplishment of the goal
Measurable
Attainable and not impossible to achieve
Achievable
Within reach and relevant to your purpose
Realistic
with a clearly defined timeline, including a starting date and a target date
Timely
Frequency of Reviewing Investment Policy Statement
- At least every 1 or 3 years
- Whenever updates are necessitated by the client
- Whenever managers express the intention to invest in complex investment products
- Prior to material changes to any specific investmentrecommendations or decisions on behalf of the client.
Assessment of an individual’s or a company’s willingness and ability to take and manage risks.
Investment Risk Profiling
To ensure that the investment and financial recommendations match an investor’s financial and emotional aptitude to engage in financial transactions that entail financial/investment risk.
Investment Risk Profiling
Factors of an Investment Risk Profile
- Need for risk
- Ability to take risk
- Behavioral Loss Tolerance
This is related to establishing the investor’s goals and the required return needed to grow or preserve current assets to fund future goals.
Need for risk
refers to the amount of portfolio risk an investor must accept to meet a specific financial goal
Required rate of return
the current and future market environment can play an important role in shaping portfolio development and allocation decisions
Market risk environment
financial and emotional threats an investor faces if a goal is not achieved
Consequences of failure
Formula of Rate or Return
RRR = Return / Initial Investment
market value of all the final goods and services produced by a country by a given period of time
Gross Domestic Product (GDP)
the value of final goods and services produced by a domestic economy for a year at current market prices
Nominal GDP
the value of final goods and services produced in a given year when valued at a constant prices, (eliminates the effects of inflation)
Real GDP
Formula of GDP (Expense Approach)
GDP = C + I + G + (X-M)
Formula of GDP (Income Approach)
GDP = Wages + Self Employment Income + Rent + Interest + Profits + Indirect business Taxes (e.g. VAT) + Depreciation & Amortization + Income of Foreigners
Causes of Inflation
- Demand-pull inflation
- Cost-push inflation
a sustained increase in an economy’s average
Inflation
measures the price changes for goods and services purchased by consumers.
Consumer Price Index
Formula of Inflation Rate
Inflation Rate = (CPI this Year) - (CPI last year) / CPI last year x 100
measures the price changes for goods and services at the wholesale level
Wholesale price index
measures the changes in price for goods and services included in GDP
GDP deflator
the sum of employed plus unemployed workers
Labor force
Formula of unemplyment rate
Unemployment rate = Number of people unemployed / labor force x 100
government actions, such as taxes, subsidies, and government spending designed to achieve economic goals.
Fiscal Policy
actions under the control of BSP
Monetary Policy
Establishing an Investor’s Risk Taking Ability
- Goal Time Horizon
- Need For Liquidity
- Risk Capacity
The period when the goal is established and the date of the goal’s
achievement.
Goal Time Horizon
An objective requirement or desire to hold cash for ongoing or future distribution needs.
Need For Liquidity
Refers to an investor’s financial capacity to withstand financial loss
without compromising the desired standard of living.
Risk Capacity
Establishing an Investor’s Behavioral Risk Tolerance
- Risk Tolerance
- Risk Preference
- Financial Knowledge
- Investment Experience
- Risk Perception
- Risk Composure
This represents the maximum amount of uncertainty an investor is willing to accept when making a financial decision
Risk Tolerance
This represents the combined financial information, facts, and skills an investor exhibits and uses when making financial decisions.
Financial Knowledge
loss-averse vs. risk-averse or safety vs. returns
Risk Preference
This refers to an investor’s mastery of financial topics and skills obtained through action, behavior, or participation in financial and/or investment activities.
Investment Experience
This refers to a judgment an investor makes (feels) regarding the severity of risk in association with a broader economic environment.
Risk Perception
This refers to the likelihood that in a perceived or actual crisis, an investor will exhibit behavior fundamentally different from her past actions.
Risk Composure
Primary goal is to prevent the loss of principal.
(cash and cash equivalents, time deposits short term government securities)
Conservative
Classification of an Investor
- Conservative
2.Moderate - Aggressive
Prospects of higher returns than traditional deposit products for some level of risks
(fixed income securities/bonds)
Moderate
prospects of capital appreciation over time and has the willingness to accept higher risks involving volatility of returns and possible loss of capital in return for higher long-term results
(equities – stocks/preferred shares)
Aggressive
A document wherein risks associated to the specific investment are laid out for the client to understand
Risk Disclosure Statement
option to reclassify to a different classification other than what was previously concluded
Waiver
