Investment

Constraints
 Prepared By: Umme Kulsoom

Government College Women University, Faisalabad

• Subject Name: Investment and Portfolio Management

• Course Code: BBA-
• Instructor Name: Umme Kulsoom
• Class & Section: BBA 7th (B)
• Chapter Name: The Asset Allocation Decision
• Lecture No: 15
 Prepared By: Umme Kulsoom

Learning outcomes
After studying this chapter students will be able to explain;
1. Investment Constraints
• liquidity needs,
• an investment time horizon,
• tax factors,
• legal and regulatory constraints,
• and unique needs and preferences.
 Prepared By: Umme Kulsoom

Investment Constraints

In addition to the investment objective that sets limits on

risk and return, certain other constraints also affect the
investment plan. Investment constraints include;

• liquidity needs,
• an investment time horizon,
• tax factors,
• legal and regulatory constraints,
• and unique needs and preferences.
 Prepared By: Umme Kulsoom

Liquidity Needs

An asset is liquid if it can be quickly converted to cash at a

price close to fair market value. Generally, assets are more
liquid if many traders are interested in a fairly standardized
product. Treasury bills are a highly liquid security, and real
estate and venture capital are not.
 Prepared By: Umme Kulsoom

Time Horizon

Time horizon as an investment constraint briefly entered

our earlier discussion of near-term and long-term high-
priority goals. A close (but not perfect) relationship exists
between an investor’s time horizon, liquidity needs, and
ability to handle risk. Investors with long investment
horizons generally require less liquidity and can tolerate
greater portfolio risk: less liquidity because the funds are
not usually needed for many years; greater risk tolerance
because any shortfalls or losses can be overcome by
earnings and returns in subsequent years.
 Prepared By: Umme Kulsoom

Tax Concerns

Investment planning is complicated by the tax code; taxes

complicate the situation even more if international
investments are part of the portfolio. Taxable income from
interest, dividends, or rents is taxable at the investor’s
marginal tax rate. The marginal tax rate is the proportion of
the next one dollar in income paid as taxes.
 Prepared By: Umme Kulsoom

Legal and Regulatory Factors

Both the investment process and the financial markets are

highly regulated and subject to numerous laws. At times,
these legal and regulatory factors constrain the investment
strategies of individuals and institutions.
 Prepared By: Umme Kulsoom

Unique Needs and Preferences

This category covers the individual and sometimes

idiosyncratic concerns of each investor. Some investors may
want to exclude certain investments from their portfolio
solely on the basis of personal preference or for social
consciousness reasons. For example, they may request that no
firms that manufacture or sell tobacco, alcohol, pornography,
or environmentally harmful products be included in their
portfolio. Some mutual funds screen according to this type of
social responsibility criterion.
 Prepared By: Umme Kulsoom

References

• Investments Analysis and Portfolio

Management by Reilly and Brown
 • Thank You
• Best of Luck for the Learning Process