1 / 19

Chapter 20 BUILDING AND MANAGING AN INVESTMENTPORTFOLIO

Chapter 20 BUILDING AND MANAGING AN INVESTMENTPORTFOLIO. What is the process of building and managing an investment portfolio? How is an investment policy developed? How do capital market assumptions affect the investment process? What is asset allocation?

seth-emerson
Download Presentation

Chapter 20 BUILDING AND MANAGING AN INVESTMENTPORTFOLIO

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 20BUILDING AND MANAGING AN INVESTMENTPORTFOLIO • What is the process of building and managing an investment portfolio? • How is an investment policy developed? • How do capital market assumptions affect the investment process? • What is asset allocation? • What does monitoring a portfolio involve? Contemporary Investments: Chapter 20

  2. Constructing and managing an investment portfolio • Investment policy • Investment objectives • Investment constraints • Preferences • Formulating financial market expectations Contemporary Investments: Chapter 20

  3. Constructing and managing an investment portfolio-Cont. • Portfolio construction • Strategic asset allocation • Tactical asset allocation • Portfolio monitoring Contemporary Investments: Chapter 20

  4. Figure 20.1 – An Outline of Portfolio Construction and Management Process Contemporary Investments: Chapter 20

  5. Developing an investment policy • Differences between individuals and institutions • Time horizon • Changes in investor characteristics • Risk and behavior • Reasons for investing • Regulatory and legal constraints • Taxes Contemporary Investments: Chapter 20

  6. Formulating investment objectives • The three objectives • Growth in capital • Preservation of capital • Current income • Prioritizing these objectives • Real life examples • Mark’s retirement • Kim’s daughter’s college education Contemporary Investments: Chapter 20

  7. Constraints • Definition • Time horizon • Liquidity needs Contemporary Investments: Chapter 20

  8. Constraints –Cont. • Taxes • Capital gains are taxed at a lower rate than ordinary income • Only realized capital gains are taxed • Retirement plans offer substantial tax benefits • Estate tax rates are higher than income tax rates • Regulatory and legal constraints • Special needs, circumstances and goals Contemporary Investments: Chapter 20

  9. Financial market expectations • Macro-expectations • Based on the historical record • Stocks have outperformed bonds and cash investments by substantial margins • Stock returns have exhibited much more year-to-year variability than other investment returns • Much of the variability in stock returns has disappeared over longer holding periods Contemporary Investments: Chapter 20

  10. Figure 20.2 – The Growth of a $1,000 Investment, 1925-2001 Contemporary Investments: Chapter 20

  11. Some observations • Stocks are better long-term investments than other financial assets • Long-term returns are far more predictable (or less uncertain) than short-term returns • The historical record is just that, a record of what happened Contemporary Investments: Chapter 20

  12. Financial market expectations - Cont. • Micro-expectations • Definition • Based on the historical record • Micro-expectations are more difficult Contemporary Investments: Chapter 20

  13. Figure 20.3 – Returns from Large- and Small-Company Stocks Contemporary Investments: Chapter 20

  14. Asset allocation • Types of asset allocation decisions • Strategic asset allocation • Based on objectives, return requirements, time horizon and risk preferences • Role of macro and micro-expectations • Tactical asset allocation • Which is more important Contemporary Investments: Chapter 20

  15. Asset allocation - Cont. • Life cycle approach to asset allocation • Diversification and portfolio optimization Contemporary Investments: Chapter 20

  16. Figure 20.4 – A Simple Model of Asset Allocation Contemporary Investments: Chapter 20

  17. Investment Insight – Some Suggested Retirement Portfolios Contemporary Investments: Chapter 20

  18. Figure 20.5 – Efficient Frontier: Combinations of Large Stocks, Small Stocks, Bonds, and Bills Contemporary Investments: Chapter 20

  19. Monitoring portfolios • Active versus passive management • Changes in investor circumstances • Getting older • Increases in wealth • Change in family status • Rebalancing • Performance measures and evaluation Contemporary Investments: Chapter 20

More Related