Objective and Investment Policy

Question 1

Identify 5 need for investment policy statement (5)

Answer 1

• understand investor need and articulate realistic investment objectives and constraints
• set standard for evaluating portfolio performance
• help reduce possibility of inappropriate or unethical behaviour on the part of portfolio manager
• create seamless transition from one money manager to another without costly delay
• framework to help resolve any potential disagreement between client and manager

Question 2

What are the objectives of investment policy (6)

Answer 2

• risk: willing to take risk
• return:
• capital preservation: minimize risk of real loss
• capital appreciation: growth of the portfolio in real term to meet future needs
• current income: focus on generating income
• total return: increase portfolio value by capital gain and by reinvesting current income

Question 3

What are the constraints policy (5)

Answer 3

• SRI/Unique preference
• Liquidity needs: depend on age, income, tax
• Time horizon: longer investment mean less liquidity need and more risk tolerance
• tax: capital gain or loss
• legal/regulatory: fiduciary responsibility