MIP CH 1: Portfolio Management Process and the Investment Policy Statement

Question 1

What is the investment policy statement (IPS)?

Answer 1

The investment policy statement (IPS) is a written document outlining the client’s
return objectives, risk tolerances, and constraints (e.g. liquidity)

Question 2

Define portfolio management

Answer 2

An ongoing process that has the following characteristics:

• Investment objectives and constraints are identified and specified
• Investment strategies are developed
• Portfolio composition is decided in detail
• Portfolio decisions are initiated by portfolio managers and implemented by traders
• Portfolio performance is measured and evaluated
• Investor and market conditions are monitored
• Any necessary rebalancing is implemented

Question 3

What are the three parts of the portfolio management process? Which step does
rebalancing belong to?

Answer 3

1. Planning
2. Execution
3. Feedback

Rebalancing belongs to the Feedback Step

Question 4

What are some investment objectives and constraints?

Answer 4

Objectives

• Risk
• Return

Constraints

• Liquidity
• Time Horizon
• Tax Concerns
• Legal and Regulatory Factors
• Unique Circumstances

Question 5

Describe the planning step for the portfolio management process

Answer 5

1. Identifying and Specifying the Investor Objectives and Constraints
2. Creating the Investment Policy Statement (IPS)
3. Forming Capital Market Expectations
4. Creating the Strategic Asset Allocation

Question 6

Describe the execution step for the portfolio management process

Answer 6

• Integrate investment strategy with capital market expectations to select the specific assets
• Portfolio optimization can be used in this step
• May intentionally differ from the strategic asset allocation because the client’s circumstances have temporarily changed or to take advantage of the capital markets (tactical asset allocation)
• Transaction costs are both explicit (commissions, fees, and taxes) and implicit (bid-ask spread, market impact of trade, missed opportunities)

Question 7

Describe the feedback step for the portfolio management process.

Answer 7

1. Monitoring and Rebalancing
   
   • Monitor ongoing exposures to available investment opportunities
   • Must watch investor circumstances (e.g. employment change, death of spouse) and
   • market input factors
   • Asset price changes can trigger a need for rebalancing
2. Performance Evaluation
   
   • Performance Measurement
   • Performance Attribution
   • Performance Appraisal