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Portfolio ManagementModule 3 of 3

Portfolio Management Overview and Planning

5

Concepts

0

Formulas

1

Decisions

3

Quiz Questions

Key Concepts

5 concepts covered in this module.

IPS (Investment Policy Statement)

Document governing the investment process. Includes: return objectives, risk tolerance, constraints (LTTLU).

IPS Constraints (LTTLU)

Liquidity needs, Time horizon, Tax considerations, Legal/regulatory, Unique circumstances.

Types of Investors

Individual (life-cycle), Pension funds (DB: long-term, defined liability; DC: participant-directed), Endowments, Insurance.

Strategic Asset Allocation

Long-term target weights based on IPS. Rebalanced periodically. Determines majority of portfolio return.

Behavioral Biases

Loss aversion: pain of loss > pleasure of gain. Overconfidence: excessive trading. Herding: following the crowd.

Decision Frameworks

1 decision frameworks to guide your analysis.

How to set return objectives?

  • Required return: minimum needed to meet obligations
  • Desired return: what the investor wants (may exceed required)
  • Both must consider inflation, taxes, fees

Mind Map

Visual overview of how concepts connect in this module.

Portfolio Management
IPS Components
Return objectives
Risk tolerance
Constraints: LTTLU
Investor Types
Individual
DB pension
DC pension
Endowment
Insurance
Asset Allocation
Strategic (long-term)
Tactical (short-term)
Determines most of returns
Behavioral Biases
Loss aversion
Overconfidence
Herding
Mental accounting
Anchoring

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Previous Module

Portfolio Risk and Return: Part II