BFIN 3020 CH 16

7 Steps of the portfolio management process

1. Investment objectives/constraints 2. Design investment policy statement 3. Develop Asset Mix 4. Select securities 5. Monitor the client, market and economy 6. Evaluate portfolio performance 7. Rebalance

3 primary investment objective components

safety of capital, income, growth of capital

secondary investment objectives

liquidity, and tax minimization

what are the characteristics of Conservative equities?

low risk, high capitalization, predictable earnings, high yield, high dividend payouts, lower P/E ratio, low price volatility

what are the characteristics of Growth equities?

Medium risk, average capitalization, potential for above average growth in earnings, aggressive management, lower dividend payout, high P/E ratio, potentially higher volatility

what are the characteristics of Venture equities?

High risk, low capitalization, limited earnings record, no dividends, insignificant P/E ratio, short operating history, highly volatile

what are the characteristics of Speculative equities?

Maximum risk, shorter term, maximum price volatility, no earnings, no dividends, insignificant P/E ratio

what are the common investment constraints?

time horizon, liquidity requirements, tax requirements, legal and regulatory requirements, unique circumstances.

unique circumstances

may include client preferences such as ethical investing or socially responsible investing, or anything to do with the personal convictions of a client.

investment policy statement

the agreement between a portfolio manager and client that provides the guidelines for the manager. It outlines how the assets within the portfolio are to be managed.

What is included in an investment policy statement?

operating rules and guidelines, asset allocation, investment objectives and constraints, acceptable/prohibited investments, performance evaluation criteria, and schedule for portfolio reviews.

What is the normal percentage weighting range for Cash in a portfolio?

5%-10%

Risk averse investors may have up to what percent of cash in their asset mix?

10%

what non-cash securities are considered cash equivalent?

money market securities, redeemable GICs, and bonds with <1 year maturity

What are considered fixed-income securities (in portfolios)?

bond due in >1 year, strip bonds, mortgage-backed securities, fixed-income ETFs, bond mutual funds, preferred shares.

What are considered equity securities (in portfolios)?

common shares, equity ETFs, equity mutual funds, and convertible bonds/preferred shares.

What investment strategy should be used in a contraction phase?

Lengthen duration of fixed-income investments to reduce interest rate risk. Reduce stock exposure.

What investment strategy should be used in a trough phase?

sell long term bond, buy cyclical equities.

What investment strategy should be used in a recovery phase?

increase common stock.

What investment strategy should be used in a peak phase?

reduce common stock, increase short term bonds.

in which phase of the business cycle does the yield curve invert?

peak

What are the 2 biggest contributors to changes in stock market prices?

interest rate trends, and economic trends.

strategic asset allocation

an asset allocation strategy that rebalances investment portfolios regularly to maintain a consistent long term mix (long term)

dynamic asset allocation

an asset allocation strategy that adjusts the investment mix in response to systematically rebalance the portfolio back to its long term target. (more short term and market focused)

what asset allocation strategy (dynamic or strategic) is best for a risk-averse investor?

dynamic strategic allocation.

tactical asset allocation

an asset allocation strategy that temporarily deviates from the investment mix and allows you to take advantage of opportunities in the market for one asset class before reverting it back to the original allocation.

3 areas of focus in the monitoring process

changes in investor goals/finances, expectations for individual securities/capital markets, industry trends/overall economy

if any significant changes occur in the monitoring stage, what should you do?

complete an amended account application

risk adjusted rate of return

a measure how how much risk is involved to produce a return.

sharpe ratio

a ratio measure of the portfolios risk adjusted rate of return using a std deviation as the measure of risk.

A sharpe ratio _________ than the benchmark, indicates outperformance

greater