Vol. 6 LM1 Risk and Return Objectives

Question 1

Concept (IPS)

are specifications for portfolio risk that reflect the client’s desires

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Answer 1

risk objectives

Question 2

Define (IPS)

risk objectives

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Answer 2

are specifications for portfolio risk that reflect the client’s risk tolerance

Question 3

categories

risk objectives

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Answer 3

• absolute
• relative

Question 4

example

absolute risk objectives

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Answer 4

the desire not to lose more than a certain percentage threshold of capital in any 12-month period might be restated as an objective that with 95% probability the portfolio not lose more than the stated amount within the stated timeframe..

Question 5

Define

value at risk

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Answer 5

is a money measure of the minimum value of losses expected during a specified period at a given level of probability

Question 6

specifcy measure

for risk relative to a benchmark

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Answer 6

tracking risk or tracking error

Question 7

Define

tracking risk

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Answer 7

is the standard deviation of the differences between a portfolio’s returns and its benchmark’s returns

Question 8

Concept

is the standard deviation of the differences between a portfolio’s returns and its benchmark’s returns

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Answer 8

Tracking risk

Question 9

Concept

in some cases where the size, timing and/or relative certainty of future investor financial obligations are known, an IPS may be tailored to meet these objectives

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Answer 9

liability-driven investment (LDI)

Question 10

examples

LDI

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Answer 10

• life insurance companies
• defined benefit pension plans
• an individual’s budget after retirement

Question 11

Define

policy portfolio

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Answer 11

a specified set of long-term asset class weightings and hedge ratios

Question 12

Concept

this type of portfolio may be used when the risk objective is to have the return be within a band of plus or minus X% of the benchmark return

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Answer 12

policy portfolio

Question 13

List

a client’s overall risk tolerance is a function of …

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Answer 13

• the client’s ability to bear (accept) risk and;
• and their “risk attitude”, which might be considered as the client’s willingness to take risk

Question 14

describe

ability to bear risk

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Answer 14

measured mainly in terms of objective factors, such as time horizon, expected income, and level of wealth relative to liabilities.

Question 15

describe

willingness to take risk

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Answer 15

a more subjective factor based on the client’s psychology and perhaps also his current circumstances

Question 16

what is the conclusion

When ability to take risk is below average and willingness to take risk is above average

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Answer 16

The investor’s risk tolerance should be assessed as below average overall

Question 17

What is the conclusion

When ability to take risk is above average but willingness is below average

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Answer 17

The portfolio manager or adviser may seek to counsel the client and explain the conflict and its implications