MIP Ch 1: Portfolio Management Process & IPS

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

Planning, Execution, and Feedback. Rebalancing belongs to the Feedback Step.

Question 4

What are some investment objectives and constraints?

Answer 4

Objectives
Ÿ Risk
Ÿ Return

Constraints
Ÿ Liquidity
Ÿ Time Horizon
Ÿ Tax Concerns
Ÿ Legal and Regulatory Factors
Ÿ 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
   Ÿ Monitor ongoing exposures to available investment opportunities
   Ÿ Must watch investor circumstances (e.g. employment change, death of spouse) and
   market input factors
   Ÿ Asset price changes can trigger a need for rebalancing
2. Performance Evaluation
   Ÿ Performance Measurement
   Ÿ Performance Attribution
   Ÿ Performance Appraisal