Chapter 2 - x

Chapter 2 - x - Lecture Presentation Software to accompany...

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Unformatted text preview: Lecture Presentation Software to accompany Investment Analysis and Portfolio Management Eighth Edition by Frank K. Reilly & Keith C. Brown Chapter 2 Chapter 2 The Asset Allocation Decision Questions to be answered: What is asset allocation? What are the four steps in the portfolio management process? What is the role of asset allocation in investment planning? Why is a policy statement important to the planning process? Chapter 2 The Asset Allocation Decision What objectives and constraints should be detailed in a policy statement? How and why do investment goals change over a persons lifetime and circumstances? Why do asset allocation strategies differ across national boundaries? Financial Plan Preliminaries Insurance Life insurance Term life insurance - Provides death benefit only. Premium could change every renewal period Universal and variable life insurance provide cash value plus death benefit Financial Plan Preliminaries Insurance Health insurance Disability insurance Automobile insurance Home/rental insurance Liability insurance Financial Plan Preliminaries Cash reserve To meet emergency needs Includes cash equivalents (liquid investments) Equal to six months living expenses recommended by experts Individual Investor Life Cycle Accumulation phase early to middle years of working career Consolidation phase past midpoint of careers. Earnings greater than expenses Spending/Gifting phase begins after retirement Individual Investor Life Cycle 25 35 45 55 65 75 Net Worth Age Accumulation Phase Long-term: Retirement Childrens college Short-term: House Car Consolidation Phase Long-term: Retirement Short-term: Vacations Childrens College Spending Phase Gifting Phase Long-term: Estate Planning Short-term: Lifestyle Needs Gifts Exhibit 2.1 Life Cycle Investment Goals Near-term, high-priority goals Long-term, high-priority goals Lower-priority goals The Portfolio Management Process 1. Policy statement - Focus: Investors short-term and long-term needs, familiarity with capital market history, and expectations 2. Examine current and project financial, economic, political, and social conditions - Focus: Short-term and intermediate-term expected conditions to use in constructing a specific portfolio 3. Implement the plan by constructing the portfolio - Focus: Meet the investors needs at the minimum risk levels 4. Feedback loop: Monitor and update investor needs, environmental conditions, portfolio performance Exhibit 2.3 The Portfolio Management Process 1. Policy statement specifies investment goals and acceptable risk levels should be reviewed periodically guides all investment decisions The Portfolio Management Process...
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This note was uploaded on 08/29/2009 for the course BUS Invt taught by Professor Yost during the Spring '09 term at W. Florida.

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Chapter 2 - x - Lecture Presentation Software to accompany...

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