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Chapter 21
Charles P. Jones, Investments: Analysis and
Management,
Tenth Edition, John Wiley & Sons
Prepared by
G.D. Koppenhaver, Iowa State University
21-1
Portfolio Management
21-2
Portfolio Management
as a Process
Definite structure everyone can follow
Integrates a set of activities in a logical
and orderly manner
Continuous and systematic
Encompasses all portfolio investments
With a structured process, anyone can
execute decisions for investor
21-3
Portfolio Management
as a Process
Objectives, constraints, and
preferences are identified
Leads to explicit investment policies
Strategies developed and implemented
Market conditions, asset mix, and
investor circumstances are monitored
Portfolio adjustments are made as
necessary
21-4
Individual vs.
Institutional Investors
Institutional Individual investors
investors Life stage matters
Maintain relatively Risk defined as “losing
constant profile over money”
time Characterized by
Legal and regulatory personalities
constraints Goals important
Well-defined and Tax management is
effective policy is important part of
critical decisions
21-5
Institutional Investors
21-6
Formulate Investment Policy
21-7
Life Cycle Approach
Risk/return position
at various life cycle
stages
A: Accumulation
A phase - early career
Return
B: Consolidation
B phase - mid-to late
C career
C: Spending phase -
spending and gifting
Risk
21-8
Formulate Investment Policy
21-9
Formulate Investment Policy
21-10
Legal and Regulatory
Requirements
Prudent Man Rule
Followed in fiduciary responsibility
Interpretation can change with time and
circumstances
Standard applied to individual investments
rather than the portfolio as a whole
ERISA requires diversification and
standards applied to entire portfolio
21-11
Capital Market Expectations
Macro factors
Expectations about the capital markets
Micro factors
Estimates that influence the selection of a
particular asset for a particular portfolio
Rate of return assumptions
Make them realistic
Study historical returns carefully
21-12
Rate of Return Assumptions
21-13
Constructing the Portfolio
21-14
Asset Allocation
21-15
Asset Allocation
21-16
Monitoring Conditions
and Circumstances
Investor circumstances can change for
several reasons
Wealth changes affect risk tolerance
Investment horizon changes
Liquidity requirement changes
Tax circumstance changes
Regulatory considerations
Unique needs and circumstances
21-17
Portfolio Adjustments
21-18
Performance Measurement
21-19
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21-20