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Administrative Studies
Course Code
ADMS 4501

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Advanced Portfolio Management ADMS 4501 – Winter 2012 – Lois King Lecture 2 – Chapter 2 – The Asset Allocation Decision – Jan 12   The Asset Allocation Decision ­ Individual investor life cycle. ­ The portfolio management process. ­ The need for policy statement. ­ Constructing the policy statement. ­ The importance of asset allocation. What is Asset Allocation? ­ Asset allocation o Process of deciding how to distribute an investor’s wealth among different countries and asset classes for investment purposes. ­ Asset class o Group of securities that have similar characteristics, attributes, and risk/return relationships. ­ Investor o Depending on the type of investors, investment objectives and constraints vary.  Individual investors.  Institutional investors. Individual Investor Life Cycle: Preliminaries ­ Life insurance: providing death benefits and, possibly, additional cash values. o Term life and whole life insurance. o Universal and variable life insurance. ­ Non-life insurance o Health insurance & disability insurance. o Automobile insurance & home/rental insurance. ­ Cash reserve o To meet emergency needs. o Equal to six months living expenses. Phases of an Investor’s Life Cycle ­ Accumulation phase o Early to middle years of working career. ­ Consolidation phase o Past midpoint of careers. Earnings greater than expenses. ­ Spending/gifting phase o Begins after retirement. Life Cycle Investment Goals ­ Near-term, high-priority goals. ­ Long-term, high-priority goals. ­ Lower-priority goals. Portfolio Management Process: Policy Statement ­ Specifies investment goals and acceptable risk levels. ­ Should be reviewed periodically. ­ Guides all investment decisions. Portfolio Management Process ­ Policy statement o Focus: Investor’s short-term and long-term needs, familiarity with capital market history, and expectations. ­ Examine current and projected financial, economic, political and social conditions. o Focus: Short-term and intermediate-term expected conditions to use in constructing a specific portfolio. ­ Implement the plan by constructing the portfolio. o Focus: Meet the investor’s needs at minimum risk levels. ­ Feedback loop: monitor and update investor needs, environmental conditions, evaluate portfolio performance. Need for Policy Statement ­ Understand investor’s needs and articulate realistic investment objectives and constraints. o What are the real risks of an adverse financial outcome, and what emotional reactions will I have? o How knowledgeable am I about investments and the financial markets? o What other capital or income sources do I have? How important is this particular portfolio to my overall financial position? o What, if any, legal restrictions affect me? o How would any unanticipated portfolio value change might affect my investment policy? ­ Sets standards for evaluating portfolio performance. o Provides a comparison standard in judging the performance of the portfolio manager. o Benchmark portfolio or comparison standard is used to reflect the risk and return objectives specified in the policy statement. o Should act as a starting point for periodic portfolio review and client communication with the manager. ­ Other benefits o Reduces possibility of inappropriate or unethical behaviour of the portfolio manager. o Helps create seamless transition from one money manager to another without costly delays. o Provides the framework to help resolve any potential disagreements between the client and the manager. Input to the Policy Statement ­ Constructing the policy statement begins with a profile analysis of the investor’s current and future financial situations and a discussion of investment objectives and constraints. ­ Objectives o Risk o Return ­ Constraints o Liquidity, time horizon, tax factors, legal and regulatory constraints, and unique needs and preferences. Investment Objectives ­ Risk objectives o Should be based on investor’s ability to take ris
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