Vol. 6 LM1 IPS Constraints Other

Question 1

Concept

should state what the likely requirements are to withdraw funds from the portfolio

p 14

Answer 1

liquidity requirements

Question 2

Document

should state the time horizon over which the investor is investing

Answer 2

IPS

Question 3

how might the time horizon affect the nature of investment

p 14

Answer 3

illiquid or risky investments may be unsuitable for an investor with a short time horizon

Question 4

taxation differential

income vs gain

p 16

Answer 4

• income may be taxed as it is earned
• gains may be taxed when they are realized

Question 5

taxable investor in US vs pension fund

which investor is more likely to invest in municipal bonds

p 16

Answer 5

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.

Question 6

reason

IPS should state any legal and regulatory restrictions

p 16

Answer 6

• in some countries, institutional investors such as pension funds are subject to restrictions on portfolio composition
• self-investment limits

Question 7

List

six generic ESG investment approaches

p 17

Answer 7

• negative screening
• positive screening
• ESG integration
• thematic investing
• engagement/active ownership
• impact investing

Question 8

describe

Negative screening

p 17

Answer 8

excluding companies or sectors based on business activities or environmental or social concerns

Question 9

describe

Positive screening

p 17

Answer 9

including sectors or companies based on specific ESG criteria, typically ESG performance relative to industry peers

Question 10

describe

ESG integration

p 17

Answer 10

systematic consideration of material ESG factors in asset allocation, security selection, and portfolio construction decisions

Question 11

describe

Thematic investing

p 17

Answer 11

investing in themes or assets related to ESG factors

Question 12

describe

Engagement/active ownership

p 17

Answer 12

Using shareholder power to influence corporate behavior to achieve targeted ESG objectives along with financial returns

Question 13

describe

Impact investing

p 17

Answer 13

investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return

Question 14

An exercise in fact finding about the customer should take place when

p 19

Answer 14

at the beginning of the client relationship

Question 15

true or false

the health of the client and their dependents is also relevant information

p 19

Answer 15

true

Question 16

list five

portfolio constraints

p 21

Answer 16

• liquidity
• time horizon
• tax status
• legal and regulatory factors
• unique needs

Question 17

describe

asset class

p 21

Answer 17

is a category of assets that have similar characteristics, attributes and risk-return relationships

Question 18

describe

strategic asset allocation (SAA)

p 21

Answer 18

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

Question 19

Describe

systematic risk

p 22

Answer 19

is risk related to the economic system that cannot be eliminated by holding a diversified portfolio

Question 20

Describe

nonsystematic risk

p 22

Answer 20

defined as the unqiue risks of particular assets, which may be avoided by holding other assets with offsetting risks

Question 21

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

Answer 21

capital market expectations

Question 22

quantification in terms

capital market expectations

p 22

Answer 22

• asset class expected returns
• standard deviation of returns
• correlations among pairs of asset classes

Question 23

list criteria

defining asset classes

Answer 23

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

Question 24

Concept

The combination of investment objectives/constraints and capital market expectations theoretically occurs using

p 26

Answer 24

optimization techniques

Question 25

Concept

Formally, investors’ risk and return
objectives can be described as

p 26

Answer 25

utility function

Question 26

Complete the statement

capital market expectations, specified in asset classes’ expected returns, standard deviations of return, and correlations, translate into …

p 27

Answer 26

an efficient frontier of portfolios

Question 27

The covariance between the returns on asset classes i and j is given by

p 27

Answer 27

the product of the correlation between the two asset classes and their standard deviations of return

Question 28

Concept

The line that connects those portfolios with the minimal risk for each level of expected return

p 27

Answer 28

efficient frontier

Question 29

Define

minimum-variance portfolio

p 27

Answer 29

the portfolio with the minimum variance for each given level of expected return

Question 30

Describe

risk budgeting

p 30

Answer 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

Question 31

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

Answer 31

1. tactical asset allocation
2. security selection

Question 32

Describe

tactical asset allocation

p 30

Answer 32

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

Question 33

Describe

security selection

p 30

Answer 33

is an attempt to generate higher returns than the asset class benchmark by selecting securities with a higher expected return

Question 34

Concept

requires good cooperation between investor (client) and investment manager

p 37

Answer 34

shareholder engagement