Module 51.1: Portfolio Management Process Flashcards
What is the diversification ratio? Is lower the better?
calculated as the risk of an equally weighted portfolio of n securities (measured by standard deviation) to the risk of a single security selected at random from the n securities.
Lower diversification ratio means the greater risk-reduction benefit from diversification.
What are the three steps of the portfolio management process?
1) Planning Step
2) Execution Step
3) Feedback Step
Explain the planning step in the portfolio management process?
Planning - analysis of investor’s risk tolerance, return objectives, time horizon, tax exposure, liquidity needs, income needs, and any unique circumstances. Results in an investment policy statement.
Explain the execution step in the portfolio management process?
Execution - analysis of the risk and return characteristics of various asset classes to determine how funds will be allocated to the various asset types.
Top down - examine current economic conditions and forecasts.
bottown-up securitiy analysis - identify which traditional investments are undervalued
Explain the feedback step of the portfolio management process?
Feedback - overtime the investors circumstances wil change. rebalance the portfolio risk and return is a must.
What are the investment horizons for foundations and endowments?
long term investment horizons, high risk tolerance, and little need for additional liquidity.
What are defined contribution pension plans?
firm contributes a sum each period to the employee’s retirement account. Investment decisions left to the employee.
What is a defined benefit pension plan?
firm promises to make periodic payments to employees after retirement. employer contributes into a fund
What kind of risk tolerance and liquidity requirements does an insurance company have?
low risk tolerance and high liquidity requirements.
