Portfolio Review and Revisions

Question 1

Perform Portfolio Review and Revisions Process

Answer 1

Confirm the following:

a) Client goals, time horizon, circumstances, and constraints
b) Economic and market conditions and expectations
c) Absolute and relative performance
d) The effectiveness of the portfolio and/or plan
e) Reporting (e.g., tracking to primary objective and secondary objectives)

Question 2

Confirm your original client discovery

Answer 2

• Client goals
• Time horizon
• Risk tolerance
• Ability to take risk
• Circumstances
• Expectations
• Constraints

Question 3

The effectiveness of the portfolio and/or plan

Answer 3

• Measuring Efficacy
– Progress toward goals
– Compared to expectations
– Absolute vs. relative performance
– Performance vs. benchmarks and indices
• Goals based investing
• Liability driven investing

Question 4

Reporting

Answer 4

• Review progress toward
– Primary objectives
– Secondary objectives
• Performance reporting
– Net of fees, expenses, taxes, inflation
– Dollar weighted vs. time weighted returns
– Risk adjusted returns
– Absolute vs. relative risk and return metrics
– Performance attribution

Question 5

Rebalancing Methodologies and

Considerations

Answer 5

There is no fully conclusive, definitive research to suggest an optimal rebalancing “technique” (time based vs. movement based), but rebalancing is still very important.

• Calendar: review and rebalancing scheduled for period dates (e.g., semi annual, annual, etc.)
• Proportional: rebalancing occurs when target limits are hit (e.g., large cap stock allocation has risen 6% above target level)
• Volatility based: rebalancing takes place once the volatility (e.g., SDEV) of an asset class or investment rises above or falls below a threshold.

Question 6

Buy and Hold

Answer 6

a passive investment strategy in which investments are bought and held for the long term and where no rebalancing takes place
• while not considered an appropriate strategy by most financial professionals, a buy and hold strategy does have tax benefits

Question 7

Constant Mix

Answer 7

• a rebalancing method in which assets are bought or sold in order to retain target allocations
• constant mix strategies are usually either implemented on periodic calendar dates or once asset weights move beyond an acceptable target range (expressed in percentage terms)

Question 8

Constant Proportion Portfolio Insurance (CPPI)

Answer 8

• CPPI is a rebalancing strategy that assumes an investor’s risk tolerance goes up as their wealth increases.
• Minimally acceptable (floor) value of portfolio is established.
• A basic tenant of this strategy calls for additional funds to be allocated to risky assets as long as a minimum amount of safe (less risky) assets is maintained.

• formula: dollars in equities = investment multiplier times (total portfolio assets minus the allowable floor or minimum safety reserve)