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Chapter 22 - Investors and the Investment Process
CHAPTER TWENTY TWO
INVESTORS AND THE INVESTMENT PROCESS
CHAPTER OVERVIEW
1. The Investment Management Process
PPT 22-2 through PPT 22-5
2. Investor Objectives
PPT 22-6 through PPT 22-13
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Chapter 22 - Investors and the Investment Process
critical to the process of determining the risk/return trade-off. Younger investors are willing to
bear more risk for higher returns, but older investors are more willing to accept lower returns for
lower risk. It is not that long term investments are less risky, they are not. Rather young people
have time to recover from periods of poor performance and can choose to work more and save
more if need be. Setting objectives for professional investors is the same as the process for the
guaranteeing some level of benefit based on the employee’s length of employment and salary, the
policy will be most heavily influenced by the average time to retirement of the individuals covered
under the plan. Defined benefit plans are typically heavily invested in equities. The higher
expected rate of return on equities reduces the contribution required by the sponsoring company.
With a defined contribution plan the employee is actually choosing where to place the funds. In
companies tends to be much longer than banks, they are more active in long-term debt as well as
equity. However, life insurers are regulated under state laws and this may limit the amount of
equity they can hold. Life insurance companies offer different types of insurance. The basic form
of insurance, term insurance, pays a death benefit if the purchaser dies within the stated term and
pays nothing otherwise. Term insurance may be annual renewable, which is very common in
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Chapter 22 - Investors and the Investment Process
Insurance firms also offer two other major type products. First they offer policies that are a
combination of insurance and savings. The traditional plan of this type is whole life insurance
for these plans. In many plans the policyholder can also borrow at a low interest rate against the
cash value of the policy. There are variations of whole life policies including variable life and
universal life. Variable and universal life policies can offer different terms, but generally they give
the policyholder more flexibility in what they cash value is invested in the size of the premiums
and death benefit. Most conservative investors will prefer either term life or whole life. The
be called guaranteed investment contracts.
Life insurance claims are more predictable than non-life insurance companies and this allows life
insurers to take on more risk in their portfolio. In both cases investments are set up as hedges
against potential claims of policy holders.
3. Investor Constraints
PPT 22-14 through PPT 22-17
Investors are subject to a variety of constraints that will impact their investment choices. The
major constraints that may affect investment include liquidity needs, the length of the investment
client, preservation of capital is paramount.
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Chapter 22 - Investors and the Investment Process
4. Investment Policies
PPT 22-18 through PPT 22-24
Large institutional investors need to be concerned about organizational efficiency. A top-down
policy involves identification of the asset universe by the highest levels of the organization and
average returns, but the manager must balance the likelihood of better returns with the costs of
these strategies in highly competitive markets.
With a passive management strategy the investor is aiming to secure average returns but at a
lower cost.
5. Monitoring and Revising Investment Portfolios
PPT 22-25
Finally it is important for the investor to continually monitor the portfolio. By the time of
