Vol. 6 LM1 Risk and Return Objectives Flashcards
Concept (IPS)
are specifications for portfolio risk that reflect the client’s desires
p 6
risk objectives
Define (IPS)
risk objectives
p 6
are specifications for portfolio risk that reflect the client’s risk tolerance
categories
risk objectives
p 6
- absolute
- relative
example
absolute risk objectives
p 6
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..
Define
value at risk
p 7
is a money measure of the minimum value of losses expected during a specified period at a given level of probability
specifcy measure
for risk relative to a benchmark
p 7
tracking risk or tracking error
Define
tracking risk
p 7
is the standard deviation of the differences between a portfolio’s returns and its benchmark’s returns
Concept
is the standard deviation of the differences between a portfolio’s returns and its benchmark’s returns
p 7
Tracking risk
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
p 7
liability-driven investment (LDI)
examples
LDI
p 7
- life insurance companies
- defined benefit pension plans
- an individual’s budget after retirement
Define
policy portfolio
p 7
a specified set of long-term asset class weightings and hedge ratios
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
p 7
policy portfolio
List
a client’s overall risk tolerance is a function of …
p 7
- 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
describe
ability to bear risk
p 8
measured mainly in terms of objective factors, such as time horizon, expected income, and level of wealth relative to liabilities.
describe
willingness to take risk
p 8
a more subjective factor based on the client’s psychology and perhaps also his current circumstances
what is the conclusion
When ability to take risk is below average and willingness to take risk is above average
p 10
The investor’s risk tolerance should be assessed as below average overall
What is the conclusion
When ability to take risk is above average but willingness is below average
p 10
The portfolio manager or adviser may seek to counsel the client and explain the conflict and its implications
