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CHAPTER 28. Investment Policy and the Framework of the CFA Institute. Objectives. Portfolio objectives center on the risk-return trade-off between investors’ expected return and how much risk they are willing to assume Return requirements Risk tolerance.

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    1. CHAPTER 28 Investment Policy and the Framework of the CFA Institute

    2. Objectives Portfolio objectives center on the risk-return trade-off between investors’ expected return and how much risk they are willing to assume Return requirements Risk tolerance

    3. Figure 28.1 CFA Institute Investment Management Process

    4. Table 28.1 Components of the Investment Management Process

    5. Table 28.2 Components of the Investment Policy Statement

    6. Table 28.3 Determination of Portfolio Policies

    7. Individual Investors The basic factors affecting individual investor return requirements and risk tolerance: Life-cycle state Individual preferences

    8. Table 28.4 Matrix of Objectives

    9. Other Investors Personal Trusts Mutual Funds Pension Funds Endowment Funds Life Insurance Companies Non-Life Insurance Companies Banks

    10. 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 Constraints on Investment Policies

    11. Table 28.5 Matrix of Constraints

    12. Asset Allocation Steps: Specify asset classes to be included in the portfolio Specify capital market expectations Derive the efficient portfolio frontier Find the optimal asset mix

    13. Policy and Taxes Policy Statement Institutions may be governed by boards Issue official statements of investment policy Taxes and Asset Allocation May need to choose assets based on tax implications

    14. Managing Portfolios of Individual Investors Human Capital and Insurance Investment in Residence Saving for Retirement and the Assumption of Risk Retirement Planning Models Manage your own Portfolio or Rely on Others

    15. 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 Variable and universal life insurance

    16. Pension Funds Defined contribution plans Investment policy is essentially the same as for a tax-qualified individual retirement account Defined benefit plans Contractual arrangement setting out the rights and obligations of all parties

    17. Pension Funds Continued Pension investment strategies Defined contribution versus defined benefit Contingent immunization Investing in equities

    18. Investments for the Long Run Advice from the mutual fund industry Investment horizon determines which risk-free rate to choose Make simple investment choices such as TDRFs (target date retirement funds) Inflation risk and long-term investors