1.PAK-QFIPME-ToPIC5-MIP-1-The Policy Management Process and The IPS

Topic 5: Investment Policy PAK Study Manual MIP-1
MIP-1
The Portfolio Management Process and the Investment Policy
Statement
Key Points
1. Understand the portfolio management process
2. Understand the investment objectives and constraints
The Portfolio Management Process and the Investment Policy Statement (IPS)
1. Introduction
The Portfolio Management Process

- An integrated set of steps undertaken in a consistent manner
o To create and maintain an appropriate portfolio to meet clients’ stated goals
The Investment Policy Statement (IPS)

- A written document that clearly sets out
o A client’s return objectives and risk tolerance
o Over that client’s relevant time horizon
o Along with applicable constraints
 Liquidity needs
 Tax considerations
 Regulatory requirements
 Unique circumstances
Three important steps of Portfolio Management Process

1. Planning
2. Execution
3. Feedback
Capital Market Expectations

- Concern the risk and return characteristics of capital market instruments (e.g. stocks and
bonds)
Strategic Asset Allocation (Combination of the IPS and the Capital Market Expectations)
- Establish acceptable exposures to IPS-permissible asset classes
o To achieve the client’s long-run objectives and constraints
2. Investment Management
Investment Management
- The service of professionally investing money
The Economics of Investment Management

- An investment manager’s revenue is fee driven
The PAK Manual for PM Exam Page 1

o Fees are based on

 A percentage of the average amount of assets under management and
 The type of investment program run for the client
- An investment management firm’s size is judged by the amount of assets under

management
Two Types of Investors

- Institutional
- Individual
Types/Examples of Institutional Investors

- Pension funds
- Foundations and endowments
- Insurance companies
- Banks
The Investment Policy Decisions of Institutional Investors

- Are typically made by investment committees or trustees
- They also bear a fiduciary relationship to the funds
- Such a relationship imposes some legal standards regarding processes and decisions
Types of Individual Investors

- Individual
- Family
Family Offices
- Organized and owned by a family
- Are entities that assume responsibility for investment services
o Financial planning
o Estate planning
o Asset management
- Some family offices open access to their services to other families (multifamily offices)
Investment Management Companies

- Employ portfolio managers, analysts, and traders, as well as marketing and support
personnel
- Portfolio managers may use

o Outside research produced by sell-side analysts (employed by brokerages) and
o Research generated by buy-side (in-house) analysts
- The staffing of in-house research departments depends on

o The size of the investment management firm
o The variety of investment offerings
o The investment disciplines employed
3. The Portfolio Perspective
The Portfolio Perspective

- Focus on the aggregate of all the investor’s holdings: the portfolio
Modern Portfolio Theory (MPT)

- The analysis of rational portfolio choices based on the efficient use of risk
- MPT revolutionized investment management
o The importance of the portfolio perspective in achieving investment objectives is
recognized
o MPT helped spread the knowledge and use of quantitative methods in portfolio
management
Three Developments in the Investment Community Created Demand for the Portfolio Perspective
- Institutional investing plays a dominant role in financial markets so controlling the risk is
imperative
- The advance in technology and lower cost allows for implementing MPT portfolio concepts
- The investment management field is professionalized
4. Portfolio Management As a Process
Portfolio Management As a Process

- An integrated set of activities that combine in a logical, orderly manner to produce a desired
product
- The process view

o Is a dynamic and flexible concept that applies
 To all types of portfolio investments (e.g. bonds, stocks, real estate, gold,
collectibles)
 To various organizational types (e.g. trust companies, investment
counsel firms, insurance
companies, mutual funds)
 To a full range of investors (e.g. individuals, pension plans, endowments,
foundations,
insurance companies, banks)
o Is independent of
 Manager
 Location
 Investment philosophy
 Style
 Approach
5. The Portfolio Management Process Logic
Three steps in Managing any Business Process

1. Planning
2. Execution
3. Feedback
The Planning Step

1. Identify and specify the investor’s objectives and constraints
2. Create the investment policy statement
3. Form capital market expectations

4. Create the strategic asset allocation
1. Identifying and Specifying the Investor’s Objectives and Constraints

- Investment objectives
o Are desired investment outcomes (risk and return)
- Constraints
o Are limitations on the investor’s ability to take full or partial advantage of particular
investments:
 Internal constraints
• Liquidity needs
• Time horizon
• Unique circumstances
 External constraints
• Tax issues
• Legal and regulatory requirements
2. Creating the Investment Policy Statement

- The IPS serves as the governing document for all investment decision making
- A typical IPS includes the following elements:

o A brief client description
o The purpose of establishing policies and guidelines
o The duties and investment responsibilities of parties involved
o The statement of investment goals, objectives, and constraints
o The schedule for review of investment performance and the IPS
o Performance measures and benchmarks to be used in performance evaluation
o Any considerations to be taken into account in developing the strategic asset
allocation
o Investment strategies and investment styles
o Guidelines for rebalancing the portfolio based on feedback
Investment Strategy
- The manager’s approach to investment analysis and security selection
Three Types of Investment Strategies

- Passive
o Portfolio composition does not react to changes in capital market expectations
o Two types of passive investing
 Indexing
• Hold a portfolio of securities designed to replicate the returns on a
specified index of securities
 Buy-and-hold strategy
• Buy and hold the investment until maturity or the end of the
investment period
- Active
o A portfolio manager will respond to changing capital market expectations

o Its holdings differ from the portfolio’s benchmark in an attempt to produce positive
excess risk-adjusted returns (positive alpha)
o Securities held in different-from-benchmark weights reflect expectations of the
portfolio manager
- Semiactive (risk-controlled active or enhanced index)

o Seek positive alpha while keeping tight control over risk relative to the portfolio’s
benchmark
Investment Style
- Group investment disciplines that has some predictive power in explaining the future
dispersion in returns across portfolios
3. Forming Capital Market Expectations

- Create long-run forecasts of risk and return characteristics for various asset classes
o To maximize expected return for given levels of risk or
o To minimize risk for given levels of expected return
4. Creating the Strategic Asset Allocation

- The manager combines the IPS and capital market expectations to determine target
asset class weights
- The investor may consider both single-period and multiperiod perspectives
o A single-period perspective has the advantage of simplicity
o A multiperiod perspective can address
 The liquidity and tax considerations that arise from rebalancing portfolios
over time
 Serial correlation in returns
 But is more costly to implement
The Execution Step

- Two decisions are made in the execution step
o The portfolio selection/composition decision
 Portfolio managers select the specific assets for the portfolio
o The portfolio implementation decision

 Portfolio managers initiate portfolio decisions based on analysts’ inputs, and
trading desks then implement these decisions
- Subsequently, the portfolio is revised as investor circumstances or capital market

expectations change
Portfolio Selection/Composition Decision

- Portfolio optimization
o Quantitative tools for combining assets efficiently to achieve a set of return and risk
objectives
- Temporary asset allocation

o A portfolio’s actual asset allocation may purposefully and temporarily differ from
the strategic asset allocation due to the investor’s circumstances

- Tactical asset allocation

o Respond to changes in short-term capital market expectations rather than to
investor circumstances
Portfolio Implementation Decision

- Poorly managed executions result in transaction costs that reduce performance
- Transaction costs include:
o Explicit transaction costs (e.g. commissions paid to brokers, fees paid to exchanges, and
taxes)
o Implicit transaction costs (e.g. bid-ask spreads, the market price impacts of large trades)
o Missed trade opportunity costs (e.g. price changes that prevent trades from being filled)
o Delay costs (e.g. the inability to complete desired trades immediately due to order size Or
market liquidity)
The Feedback Step

- Has two components
o Monitoring and rebalancing
o Performance evaluation
1. Monitoring and Rebalancing

- Use feedback to manage ongoing exposures
o So that the client’s current objectives and constraints continue to be satisfied
Two Types of Factors are Monitored

- Investor-related factors
o E.g. changes in investor circumstances
o Portfolio managers need a process in place to stay informed of changes in clients’
circumstances
o The IPS should list the occurrence of change as a basis for appropriate portfolio
revision
- Economic and market input factors

o Changes in economic and market input factors give rise to the regular need for
portfolio revision
o Portfolio managers need to systematically review the risk attributes of assets as well
as economic and capital market factors
o A change in expectations or asset prices may trigger portfolio revision
Rebalancing
- The actual timing and magnitude of rebalancing may be triggered by
o Review periods
o Specific rules governing the management of the portfolio and deviation from the
tolerances
o Ranges specified in the strategic asset allocation
o The discretion of the manager
- The rebalancing decision must take into account many factors (e.g. transaction costs and
taxes)

o Disciplined rebalancing will have a major impact on the attainment of investment

objectives
o Rebalancing takes us back to the issues of execution
2. Performance Evaluation
- Investment performance must periodically be evaluated by the investor
o To assess progress toward the achievement of investment objectives and
o To assess portfolio management skill
Three Components in the Assessment of Portfolio Management Skill

- Performance measurement
o Calculate the portfolio’s rate of return
- Performance attribution
o Examine why the portfolio performed as it did and
o Determine the sources of a portfolio’s performance
- Performance appraisal
o Evaluate whether the manager is doing a good job based on how the portfolio did
relative to a benchmark
Three Sources of Portfolio’s Performance

1. Strategic asset allocation decisions
2. Market timing (returns attributable to shorter-term tactical deviations from the strategic
asset allocation)
3. Security selection (skill in selecting individual securities within an asset class)
Ongoing Review of the Benchmark to Establish Its Continuing Suitability

- Understand
o How economic sectors and subsectors are determined in the benchmark
o The classification of securities within them and
o How frequently the classifications change
- Review whether the benchmark continues to be a fair measurement
A Definition of Portfolio Management

- Portfolio management is an ongoing process in which:
o Investment objectives and constraints are identified and specified
o Investment strategies are developed
o Portfolio composition is decided in detail
o Portfolio decisions are initiated by portfolio managers and implemented by traders
o Portfolio performance is measured and evaluated
o Investor and market conditions are monitored
o Any necessary rebalancing is implemented

6. Investment Objectives and Constraints
Objectives
1. Risk objective
2. Return objective
(They are interdependent and should be considered together)
Risk Objective
- It will largely determine the return objective
Six Questions for Investor to Formulate a Risk Objective
1. How do I measure risk? 1. Risk Measurement

2. What is the investor’s willingness to take risk? 2. Investor’s Willingness
3. What is the investor’s ability to take risk? 3. Investor’s Ability
4. How much risk is the investor both willing and able to bear? 4. Risk Taking
5. What are the specific risk objective(s)? 5. Specific Risk Objectives
6. How should the investor allocate risk? 6. Risk Allocation
1. How Do I Measure risk?

- Risk may be measured in
o Absolute terms
 (Example) A specified level of standard deviation or variance of total
return
o Relative terms
 (Example) A specified level of tracking risk
• Tracking risk is the standard deviation of the differences between a
portfolio’s and the benchmark’s total returns
- Downside risk concepts (e.g. VaR) may also be important to an investor

o Value at risk (VaR) is a probability-based measure of the loss that one anticipates
will be exceeded only a specified small fraction of the time over a given horizon
- Other risk exposures may be considered

o E.g. exposures to specific economic sectors
o E.g. risk with respect to a factor model of returns
2. What is the Investor’s Willingness to Take Risk?

- Managers should understand the behavioral and the personality factors behind an investor’s
willingness to take risk
3. What is the Investor’s Ability to Take Risk?

- Manger should understand the items below to better assess the investor’s ability to take
risk
o Spending needs
o Long-term wealth targets or obligations
o Investor’s liabilities or pseudo liabilities

o Investor’s financial strength
4. How Much Risk is the Investor Both Willing and Able to Bear?
- This defines the investor’s risk tolerance
o Risk tolerance
 The capacity to accept risk
 Is a function of both an investor’s willingness and ability to do so
 Can be described in terms of risk aversion
o Risk aversion
 The degree of an investor’s inability and unwillingness to take risk
 If willingness > ability, ability limits the amount of risk the investor should
assume
 If ability > willingness, willingness limits the investor’s return objective
5. What are the Specific Risk Objective(s)?

- Quantitative risk objectives are easier to be specified in relative than in absolute terms
- Qualitative risk objectives are usually specified in absolute term
o E.g. convert a client’s ‘‘lower-than-average risk tolerance’’ into
 ‘‘The loss in any one year is not to exceed x% of portfolio value’’ or
 ‘‘Annual volatility of the portfolio is not to exceed y%’’
6. How Should the Investor Allocate Risk?

- Risk budgeting
o An investor allocates the overall risk budget to specific investments so as to
maximize expected overall risk-adjusted return
o Before that, the investor should determine
 The risk measure and (VaR or tracking risk)
 The desired total quantity of risk (the overall risk budget)
Return Objective
- Must be consistent with the risk objective
Four Questions for Investor to Formulate a Return Objective

1. How is return measured? 1.
Return Measurement
2. How much return does the investor say she wants? 2. Return
Desired
3. How much return does the investor need to achieve, on average? 3. Return
Required
4. What are the specific return objectives? 4.
Specific Return Objectives
1. How is Return Measured?

- The usual measure is total return (TR)
o TR = Price Appreciation Return + Investment Income Return
- Return may be stated as

o Absolute vs. relative
 An absolute amount (e.g. 10% a year)

 A return relative to the benchmark’s return (e.g. benchmark return plus

2% a year)
o Nominal vs. Real

 Nominal returns are unadjusted for inflation
 Real returns are adjusted for inflation (called inflation-adjusted returns)
 (1 + Nominal Return) = (1 + Real Return) x (1 + Inflation)
 Nominal return ≈ Real return + Inflation
o Pre-tax vs. Post-tax

 Pre-tax returns are returns before taxes
 Post-tax returns are returns after taxes are paid on investment income and
realized capital gains
2. How Much Return Does the Investor Say She Wants?

- This amount is the stated return desire to meet consumption desires or a wealth target
o E.g. I want a 20% annual return
3. How Much Return Does the Investor Need To Achieve, On Average?

- This amount is the required return (return requirement)
o Requirements are more stringent than desires
o Because investors with requirements must achieve those returns on average
- Examples of return requirement

o The average return a pension fund must earn to fund liabilities to current and future
pensioners
o The return an individual investor must earn to attain the asset base needed for
retirement
o The return a retired investor must earn to cover his annual living expenses
- Large required returns may cause potential conflict between return and risk objectives
- Other required return issues

o What are the needs and desires for current spending versus ending wealth?
o How do nominal total return requirements relate to expected rates of price
inflation?

Calculation Example #1
A married couple needs £2 million in 18 years to fund retirement and their assets total £1.2 million
1/18
 2, 000, 000 
 Need=
Total return  =  − 1 2.88% per year (after tax) to achieve their goal
 1, 200, 000 
If the couple needed to liquidate £25,000 from the portfolio at the end of each year
18
25, 000 2, 000, 000
 0=
−1, 200, 000 + ∑ (1 + IRR)
t =1
t
+
(1 + IRR)18
 IRR = 4.55% post-tax annual return
If all investment returns were taxed at 35%
4.55%
 Pre-tax annual return = = 7%
(1 − 0.35)
Calculation Example #2
Suppose that a retiree must achieve a 4% after-tax return on his portfolio to meet his annual living
expenses
 Thus, his real return requirement (after-tax basis) = 4% per year
If he expects inflation to be 2% per year and a 40% tax rate applies to investment returns
 His pretax nominal return requirement

= (After-tax real return requirement + Expected inflation rate)/(1 − Tax rate)
= (4% + 2%)/(1 − 0.40)
= 10%
4. What Are the Specific Return Objectives?

- The return objective incorporates
o The required return
o The stated return desire and
o The risk objective
 into a measurable annual total return specification
- An investor’s return objective should be consistent with that investor’s risk objective
o Higher return requires higher risk tolerance
- The anticipated portfolio return should be sufficient to meet

o Wealth or liability-funding objectives
o Spending needs
- When the return objective is not consistent with risk tolerance, other adjustments may be
needed

o E.g. increasing savings or modifying wealth objectives
- An investor delegating portfolio management to an investment manager will communicate a

mandate
o Mandate is a set of instructions detailing the investment manager’s task and how his
performance will be evaluated
- Absolute vs. relative return objective

o An absolute return objective (e.g. 8%)
o A relative return objective is stated as a return relative to the portfolio benchmark’s
total return (e.g. 1% higher than the benchmark)
EXHIBIT 1-3: Return Requirements and Risk Tolerances of Various Investors

Type of Investor Return Requirement Risk Tolerance
Depends on stage of life, circumstances, and
Individual Varies
obligations
Depends on plan and sponsor

Pension plans The return that will adequately fund
characteristics, plan features, funding
(defined benefit) liabilities on an inflation-adjusted basis
status, and workforce characteristics
Pension plans
Depends on stage of life of individual Varies with the risk tolerance of
(defined
participants individual participants
contribution)
Determined by amount of assets relative
Foundations and The return that will cover annual spending,
to needs, but generally above-average or
endowments investment expenses, and expected inflation
average
Life insurance Determined by rates used to determine Below average due to factors such as
companies policyholder reserves regulatory constraints
Non–Life insurance Determined by the need to price policies Below average due to factors such as
companies competitively and by financial needs regulatory constraints
Banks Determined by cost of funds Varies
Constraints
1. Liquidity
2. Time horizon
3. Tax concerns
4. Legal and regulatory factors
5. Unique circumstances
Liquidity
- A liquidity requirement is a need for cash in excess of new contributions/savings at a
specified point in time
o Such needs may be anticipated or unanticipated
o but either way they stem from liquidity events
o This requirement may be met
 By holding cash or cash equivalents in the portfolio or
 By converting other assets into cash equivalents

- Liquidity risk
o The risk of economic loss due to the need to sell illiquid assets to meet liquidity
requirements
o Arise for two reasons
 An asset-side reason (asset liquidity) and
 A liability-side reason (liquidity requirements)
o Portfolio managers control asset selection but not liquidity requirements
 So managers use asset selection to manage liquidity risk
- Price risk of the asset

o The risk of fluctuations in market price
o Assets with high price risk are frequently less liquid (especially during market
downturns)
o If the timing of an investor’s liquidity requirements is significantly correlated with
market downturns, these requirements can influence asset selection in favor of less
risky assets
- Consideration of both liquidity risk and price risk means

o An investor will hold some part of the portfolio in highly liquid and low-price-risk
assets in anticipation of future liquidity requirements
o Investors may modify the payoff structure of a risky portfolio using derivative
strategies
Time Horizon
- Refer to the time period associated with an investment objective
o Investment objectives and associated time horizons may be
 Short term
 Long term (time ≥ 10 years)
 Multistage horizon (a combination of the two)
• E.g. fund children’s education in shorter term and the investor’s
retirement in longer term
- Other constraints can affect an investor’s time horizon
o E.g. an individual investor’s temporary family living arrangement can change his
time horizon
Four Relevant Time Horizon Questions

1. How does the length of the time horizon modify the investor’s ability to take risk?
o The longer the time horizon
• The more risk the investor can take
• The greater the investor’s ability to replenish investment resources by
increasing savings
o A long-term investor’s labor income may be an asset sufficiently stable to support a
higher level of portfolio risk
o Cash may be safe for a short-term investor but risky for a long-term investor who
will be faced with continuously reinvesting
2. How does the length of the time horizon modify the investor’s asset allocation?
o The longer the time horizon
• The more risk the investor can take
• The more funds the investor allocates to risky assets

o Decreased risk-taking ability with shorter horizons can constrain portfolio choice
3. How does the investor’s willingness and ability to bear fluctuations in portfolio value
modify the asset allocation?
o An investor with a long-term objective may limit risk taking due to substantial
interim losses
o The chance of unanticipated liquidity needs may increase during market downturns
o An investor with unanticipated short-term liquidity needs will favor short-term
investments
4. How does a multistage time horizon constrain the investor’s asset allocation?
o The investment policy must be designed to accommodate all time horizons in a
multistage horizon case
Tax Concerns
- Arise for taxable investors
o Because tax payments reduce the amount of the total return that can be used for
current needs or reinvested for future growth
- Factors affect taxable investors’ investment decisions (the choice of investments and the
timing of sales)
1. Differences between the tax rates applying to investment income and capital gains
2. Estate taxes on wealth
3. Tax policy changes
Legal and Regulatory Factors

- External factors imposed by governmental, regulatory, or oversight authorities to constrain
investment decision making
o (U.K.) Regulations issued by the FSA limit the concentration of holdings in debt and
equity securities for U.K. mutual funds
o (U.S.) ERISA limits the acquisition and holding of employer securities by certain
pension plans
o Some countries limit the use of certain asset classes in retirement accounts
Unique Circumstances
- Internal factors that may constrain portfolio choices
o Examples
 Ethical objections or social responsibility considerations
 Family needs
 Specific concerns
 Investor capability
7. The Dynamics of the Process
The Dynamics of the Portfolios Management Process

- Consist of the steps outlined in the sections above
- Flow logically and systematically through an orderly sequence of decision making
- Is continuous once put into motion with respect to a given investor.
This View

- Approach portfolio management as an integrated whole in which

o Every decision moves the portfolio down the process path and
o No decision can be skipped without sacrificing functional integrity
8. The Future of Portfolio Management
Portfolio Management Has Become a More Science-Based Discipline

- Advances in basic theory, technology, and market structure
o Constantly translate into improvements in products and professional practices
Theoretical Advances
- Individual client
o The recognition that the risk characteristics of the nontradable assets owned by an
individual client should be included in the definition of that client’s portfolio
- Institutional client
o There is an increasing awareness and use of multifactor risk models and methods of
managing risk
Market Developments
- The emergence of a broad range of new standardized derivative contracts
o They make possible the creation of an infinite variety of customized investment
products tailored to the needs of specific clients
9. The Ethical Responsibilities of Portfolio Managers
The Dictionary Defines Professional

- As ‘‘conforming to the standards of a profession’’
- Professional standards are of two types
o Standards of competence and
o Standards of conduct
- The portfolio manager must keep in mind that she is in a position of trust
o Requiring ethical conduct toward the public, client, prospects, employers,
employees, and fellow workers
- Ethical conduct is the foundation requirement for managing investment portfolios
Practice Questions
1. Outline the three steps in the portfolio management process and its components
2. Identify the criteria to formulate the risk and return objectives
3. Answer by a TRUE or FALSE:

Solution to Practice Questions
1. Three steps in the Portfolio Management Process
The Planning Step

1. Identify and specify the investor’s objectives and constraints
2. Create the investment policy statement
3. Form capital market expectations
4. Create the strategic asset allocation
The Execution Step

1. The portfolio selection/composition decision
2. The portfolio implementation decision
The Feedback Step

1. Monitoring and rebalancing
2. Performance evaluation
2. Criteria to formulate the risk and return objectives
Six Criteria for Investor to Formulate a Risk Objective

1. Risk Measurement
2. Investor’s Willingness
3. Investor’s Ability
4. Risk Taking
5. Specific Risk Objectives
6. Risk Allocation
Four Criteria for Investor to Formulate a Return Objective

1. Return Measurement
2. Return Desired
3. Return Required
4. Specific Return Objectives
TRUE or FALSE

Past APM/8V SOA Questions Related To This Reading
SOA QFIC Spring 2018 Q15 (Must Read)

SOA QFIC Spring 2015 Q9(a) (Must Read)

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Topic 5: Investment Policy PAK Study Manual MIP-1

1. Understand the portfolio management process

2. Understand the investment objectives and constraints

The Portfolio Management Process

The Investment Policy Statement (IPS)

Three important steps of Portfolio Management Process

Capital Market Expectations

The Economics of Investment Management

The PAK Manual for PM Exam Page 1

o Fees are based on

- An investment management firm’s size is judged by the amount of assets under

Two Types of Investors

Types/Examples of Institutional Investors

The Investment Policy Decisions of Institutional Investors

Types of Individual Investors

Investment Management Companies

- Portfolio managers may use

- The staffing of in-house research departments depends on

3. The Portfolio Perspective

The Portfolio Perspective

The PAK Manual for PM Exam Page 2

- Focus on the aggregate of all the investor’s holdings: the portfolio

Modern Portfolio Theory (MPT)

4. Portfolio Management As a Process

Portfolio Management As a Process

- The process view

5. The Portfolio Management Process Logic

Three steps in Managing any Business Process

The Planning Step

The PAK Manual for PM Exam Page 3

4. Create the strategic asset allocation

1. Identifying and Specifying the Investor’s Objectives and Constraints

2. Creating the Investment Policy Statement

- A typical IPS includes the following elements:

Three Types of Investment Strategies

The PAK Manual for PM Exam Page 4

- Semiactive (risk-controlled active or enhanced index)

3. Forming Capital Market Expectations

4. Creating the Strategic Asset Allocation

The Execution Step

o The portfolio implementation decision

- Subsequently, the portfolio is revised as investor circumstances or capital market

Portfolio Selection/Composition Decision

- Temporary asset allocation

The PAK Manual for PM Exam Page 5

- Tactical asset allocation

Portfolio Implementation Decision

The Feedback Step

1. Monitoring and Rebalancing

Two Types of Factors are Monitored

- Economic and market input factors

The PAK Manual for PM Exam Page 6

o Disciplined rebalancing will have a major impact on the attainment of investment

Three Components in the Assessment of Portfolio Management Skill

Three Sources of Portfolio’s Performance

Ongoing Review of the Benchmark to Establish Its Continuing Suitability

- Review whether the benchmark continues to be a fair measurement

A Definition of Portfolio Management

The PAK Manual for PM Exam Page 7

6. Investment Objectives and Constraints

(They are interdependent and should be considered together)

Six Questions for Investor to Formulate a Risk Objective

1. How do I measure risk? 1. Risk Measurement