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The portfolio management process. The portfolio management process. Set objective and policy goals Examine and understand the environment Construct the portfolio: asset allocation & security selection Monitor and update. Individual investment objectives? . Popular belief:

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the portfolio management process1
The portfolio management process
  • Set objective and policy goals
  • Examine and understand the environment
  • Construct the portfolio: asset allocation & security selection
  • Monitor and update
individual investment objectives
Individual investment objectives?
  • Popular belief:
  • Investments are aimed at “making money”
suggested strategies for making money
Suggested strategies for “making money”
  • Put $1 in the bank at 3%.
  • Eventually you will become a billionaire
  • Put all of your earnings in the lottery.
  • Eventually you’ll hit the jackpot
goals vs objectives
Goals vs. objectives
  • Financial Goals
  • Broad financial ends, such as, buying a home, paying for children’s education, etc.
  • Investment objectives
  • Stated in terms of risk and return - a function of goals, investment horizon etc.
investment objectives
Investment objectives
  • Are dictated by risk tolerance and time horizon
  • Capital preservation
  • Income
  • Growth
individual investment objectives1
Individual investment objectives
  • Age considerations
  • Risk consideration
individual investor life cycle
Individual investor life cycle
  • Accumulation phase
  • Consolidation phase
  • Spending phase
  • Gifting phase
accumulation phase
Accumulation phase
  • Long-term goals
  • Retirement
  • Children’s education
  • Etc
  • Short-term goals
  • Car
  • House
consolidation phase
Consolidation phase
  • Long-term goals
  • Retirement
  • Short-term goals
  • Children’s education
  • Vacation
  • Etc.
spending phase
Spending phase
  • Long-term goals
  • Estate planning
  • Short-term
  • Life style
  • Gifts
gifting phase
Gifting phase
  • Long-term goals
  • Estate planning
  • Short-term
  • Life style
  • Gifts
risk considerations
Risk considerations
  • Factors:
  • Psychological makeup
  • Family situation
  • Income
  • Age
investment constraints
Investment constraints
  • Liquidity needs
  • Tax concerns
  • Regulations
  • Unique needs
liquidity needs
Liquidity needs
  • Related to investment horizon & age
  • Longer horizons = accept less liquidity & more risk
tax concerns
Tax concerns
  • Investors think in terms of after-tax return
regulations
Regulations
  • Impose restrictions and constraints
  • Ex:
  • RRSP: Foreign content rule
unique needs
Unique needs
  • A function of each individual
asset classes
Asset classes
  • Classification according to risk and expected return characteristics
  • Stocks
  • Bonds
  • Risk-free investments
asset classes1
Asset classes
  • Each class can be further divided into subclasses
  • Bonds:
  • Long-term corporate bonds
  • Long-term government bonds
  • Medium-term corporate bonds
  • Medium -term government bonds
  • Etc.
returns from investing 1 1948 1999

$ 357.3

TSE300

$ 36.4

Bonds

$ 20.4

T-bills

$ 8.4

Inflation

1945

1975

2000

Returns from investing $1: 1948-1999
world stock markets annual rates of return and risk in local currency 1986 1997

Return

27%

22%

17%

12%

7%

Standard deviation

20%

30%

World stock markets annual rates of return and risk in local currency 1986-1997
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