Portfolio Construction & Planning Flashcards
2 Decisions when deciding asset allocations
- investors financial objective
- investors tolerance/capacity for risk
what does Modern Portfolio Theory assume
Investors will take most favorable risk/return portfolios
What is Deterministic Modelling
involves taking a single input and assume it will remain constant over a period
What is Stochastic Modelling
uses many random variables to model thousands of possible investment outcomes for all asset allocations
What does stochastic modelling establish risk rating on?
- The time frame of investment
- Income or growth required
- Attitude to risk
- Amount invested
Limitations of stochastic modelling
- computationally hard to perform due to large number of events
- assumptions can be simple and unrealistic
- market returns hard to simulate
What is Strategic Asset Allocation (SAA)
- Decisions taken from long term perspective
- 5 years min
- takes long term risk with reward trade-off
What is tactical asset allocation (TAA)
- Moderately active strategy
- investors must recognise when short term opportunities have run their course and re balance portfolio to long term asset
What is correlation between assets?
measures return of 2 assets movement overtime scaled +1 to -1
1 = strong correlation
-1 = negative correlation
0 = no correlation
What are 3 factors of Investment Performance?
- Historic level of return
- Historic level of risk
- level of correlation between investment returns and each asset class
Advantages of Historical data
- considers single asset performance
- unearth trends
- can be used to contain statistical measures
Disadvantages of Historical data
- correlations between asset classes has increased
- volatility in markets has increased
- difficult to predict market behavior
What does Reduction in Yield (RIY) measure?
impact of charges on a policy
What to do when using RIY
- Take into account initial and ongoing charges and show affect over 10 years
- Tabulate results
- Provide RIY through table, listing all funds
What is a limitation of RIY
presents info at 1 moment in time, does not show impact over small periods
What is fundamental analysis?
use real data to evaluate a securities underlying value and potential for future growth with the end goal to produce a value which investors can compare with current price
What is technical analysis?
analyse securities by analysing the statistics generated by market activity
3 assumptions for Technical Analysis
- market discounts everything
- prices move in trends
- history tends to repeat itself
What is Fund analysis?
Assesses a number of different aspects of a fund to determine whether they are appropriate
What aspects of a fund does fund analysis analyse?
- investment objective
- investment philosophy
- fund manager tenure
- past performance
- volatility
- assets held in fund
Tools for evaluating companies ESR performance
- Compliance with stewardship and codes and regulation
- alignment with global and national targets
- inclusion in ESR index
Factors to consider when choosing investment provider
- size and position of market
- administrative efficiency
- competitive charges
- features and benefits of product
- financial ratings
What are wrap platforms
allows clients to invest in a variety of products via single provider
Advantages of wrap platforms for investors
- unprecedented overview and control of investments
- far greater choice in fund managers, providers and asset classes
