Reading 60 - The Portfolio Management Process

Question 1

Explain the importance of the portfolio perspective…..

**Critical Concept**

Answer 1

That investors, analysts, and porfolio managers should analyze the risk-return tradeoff of the portfolio as a whole, not the risk-return tradeoff of the individual investments in the portfolio.

Question 2

What are the steps of the portfolio management process?

**Critical Concept**

Answer 2

1. Planning
2. Execution
3. Feedback

Question 3

What is an investment policy statement (IPS) ?

Answer 3

a formal document that governs investment decision making, taking into account objectives and constraints.

Question 4

What are the main roles of an investment policy statement (IPS) ?

Answer 4

1. Be readily implemented by current or future investment advisers
2. Promote long term discipline for portfolio decisions
3. Help protect against short-term shifts in strategy when either market environments or portfolio performance cause panic or overconfidence.

Question 5

What are the elements to an IPS ?

Answer 5

1. A client description that provides enough background so any competent investment adviser can gain a common understanding of the client’s situation
2. The purpose of the IPS with respect to policies, objectives, goals, restrictions and portfolio limitations
3. Identification of duties and responsibilities of parties involved
4. The formal statement of objectives and constraints
5. A calendar schedule for both portfolio performance and IPS review
6. Guidelines for portfolio adjustments and rebalancing

Question 6

What is a strategic asset allocation?

Answer 6

It combines an IPS and capital market expectations to formulate long-term target weightings for the asset classes to be included in the portfolio.

Question 7

What are the three strategies used to implement the strategic asset allocation?

Answer 7

1. Passive investments strategies
2. Active investment strategies
3. Semi-active, risk-controlled active or enhanced index strategies

Question 8

What are investment objectives?

**Critical Concept**

Answer 8

Specific and measurable desired performance outcomes

**The two types are risk and return**

Question 9

What are risk objectives?

**Critical Concept**

Answer 9

Those factors associated with an investor’s willingness and ability to take risk.

Risk tolerance means ability to accept risk

Risk aversion means an unwillingness to take risk

Question 10

What are the two risk objective measurements ?

Answer 10

1. Absolute risk objective - ex. standard deviation of total return.
2. Relative risk objective - ex. deviations from an underlying index (i.e. tracking error )

Question 11

What are investment constraints?

Answer 11

Factors restricting or limiting the universe of available investment choices.

Question 12

What are the 5 main investment constraints?

**Critical Concept**

Answer 12

1. Liquidity constraints
2. Time horizon constraints
3. Tax constraints
4. Legal and regulatory factors
5. Unique circumstances

Question 13

Diversification can reduce:

A) systematic risk.
B) macroeconomic risks.
C) unsystematic risk.

Answer 13

Question 14

Which of the following most accurately identifies the three main steps in the portfolio management process?

A) Objectives, constraints, risk tolerance.
B) Planning, execution, feedback.
C) Planning, asset allocation, security selection.

Answer 14

Question 15

The guidelines in the investment policy statement are important because they:

A) dictate how subsequent managers should change portfolio implementation.
B) allow continuity in implementation by current and subsequent managers.
C) determine how to make portfolio shifts after dramatic short-term value declines.

Answer 15