Vol. 6 LM1 IPS Constraints Other Flashcards
Concept
should state what the likely requirements are to withdraw funds from the portfolio
p 14
liquidity requirements
Document
should state the time horizon over which the investor is investing
IPS
how might the time horizon affect the nature of investment
p 14
illiquid or risky investments may be unsuitable for an investor with a short time horizon
taxation differential
income vs gain
p 16
- income may be taxed as it is earned
- gains may be taxed when they are realized
taxable investor in US vs pension fund
which investor is more likely to invest in municipal bonds
p 16
the US based investor is likely to consider municipals than the pension fund because the pension fund is tax-exempt and is indifferent to tax.
reason
IPS should state any legal and regulatory restrictions
p 16
- in some countries, institutional investors such as pension funds are subject to restrictions on portfolio composition
- self-investment limits
List
six generic ESG investment approaches
p 17
- negative screening
- positive screening
- ESG integration
- thematic investing
- engagement/active ownership
- impact investing
describe
Negative screening
p 17
excluding companies or sectors based on business activities or environmental or social concerns
describe
Positive screening
p 17
including sectors or companies based on specific ESG criteria, typically ESG performance relative to industry peers
describe
ESG integration
p 17
systematic consideration of material ESG factors in asset allocation, security selection, and portfolio construction decisions
describe
Thematic investing
p 17
investing in themes or assets related to ESG factors
describe
Engagement/active ownership
p 17
Using shareholder power to influence corporate behavior to achieve targeted ESG objectives along with financial returns
describe
Impact investing
p 17
investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return
An exercise in fact finding about the customer should take place when
p 19
at the beginning of the client relationship
true or false
the health of the client and their dependents is also relevant information
p 19
true
list five
portfolio constraints
p 21
- liquidity
- time horizon
- tax status
- legal and regulatory factors
- unique needs
describe
asset class
p 21
is a category of assets that have similar characteristics, attributes and risk-return relationships
describe
strategic asset allocation (SAA)
p 21
is the set of exposures to IPS-permissible asset classes that is expected to achieve the client’s long-term objectives given the client’s risk profile and investment constraints
Describe
systematic risk
p 22
is risk related to the economic system that cannot be eliminated by holding a diversified portfolio
Describe
nonsystematic risk
p 22
defined as the unqiue risks of particular assets, which may be avoided by holding other assets with offsetting risks
Concept
are the investor’s expecations concerning the risk and return prospects of asset classes, however broadly or narrowly the investor defines those asset classes
p 22
capital market expectations
quantification in terms
capital market expectations
p 22
- asset class expected returns
- standard deviation of returns
- correlations among pairs of asset classes
list criteria
defining asset classes
intuitively
* an asset class should contain relatively homogeneous assets while providing diversification relative to other asset classes
statistically
* risk and return expectations should be similar
* paired correlations of assets should be relatively high within an asset class
Concept
The combination of investment objectives/constraints and capital market expectations theoretically occurs using
p 26
optimization techniques
Concept
Formally, investors’ risk and return
objectives can be described as
p 26
utility function
Complete the statement
capital market expectations, specified in asset classes’ expected returns, standard deviations of return, and correlations, translate into …
p 27
an efficient frontier of portfolios
The covariance between the returns on asset classes i and j is given by
p 27
the product of the correlation between the two asset classes and their standard deviations of return
Concept
The line that connects those portfolios with the minimal risk for each level of expected return
p 27
efficient frontier
Define
minimum-variance portfolio
p 27
the portfolio with the minimum variance for each given level of expected return
Describe
risk budgeting
p 30
is the process of deciding on the amount of risk to assume in a portfolio and subdividing that risk over the sources of investment return
List
Apart from the exposures to systematic risk factors specified in the strategic asset allocation, the returns of an investment strategy depend on two other sources:
p 30
- tactical asset allocation
- security selection
Describe
tactical asset allocation
p 30
is the decision to deliberately deviate from the policy exposures to systematic risk factors with the intent to add value based on forecasts of the ner-term returns of those asset classes
Describe
security selection
p 30
is an attempt to generate higher returns than the asset class benchmark by selecting securities with a higher expected return
Concept
requires good cooperation between investor (client) and investment manager
p 37
shareholder engagement
