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Chapter 26

Chapter 26. The Process of Portfolio Management. Determinants of Portfolio Policies. Objectives Constraints Policies Return Requirements Liquidity Asset Allocation Risk Tolerance Horizon Diversification Regulations Risk Positioning Taxes Tax Positioning

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Chapter 26

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  1. Chapter 26 The Process ofPortfolio Management 26-1

  2. Determinants of Portfolio Policies Objectives Constraints Policies Return Requirements Liquidity Asset Allocation Risk Tolerance Horizon Diversification Regulations Risk Positioning Taxes Tax Positioning Unique Needs Income Generation 26-2

  3. Matrix of Objectives Type of Investor Return Requirement Risk Tolerance Individual and Personal Trusts Life Cycle Life Cycle Mutual Funds Variable Variable Pension Funds Assumed actuarial rate Depends on payouts Endowment Funds Determined by income Generally needs and asset growth to conservative maintain real value 26-3

  4. Matrix of Objectives (cont’d) Type of Investor Return Requirement Risk Tolerance Life Insurance Spread over cost of Conservative funds and actuarial rates Nonlife Ins. Co. No minimum Conservative Banks Interest Spread Variable 26-4

  5. Constraints on Investment Policies • Liquidity • Ease (speed) with which an asset can be sold and created into cash • Investment horizon - planned liquidation date of the investment • Regulations • Prudent man law • Tax considerations • Unique needs 26-5

  6. Managing Portfolios of Individual Investors Overriding consideration is life cycle • Needs for current income • Appropriate level of risk • Appropriate level and type of life insurance • Taxes and tax planning 26-6

  7. Tax Sheltering for Individual Investors • Tax-deferral option - controlling the timing of gains on investments • Tax-deferred retirement plans • IRAs • Keogh plans • Deferred annuities • Fixed • Variable 26-7

  8. Pension Funds • Basic types of plans • Defined contribution plans • Defined benefit plans • Pension investment strategies • Defined contribution versus defined benefit • Contingent immunization • Investing in equities 26-8

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