Chapter 22 – Investors and The Investment Process
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Chapter 22 – Investors and The Investment Process
CHAPTER 22
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whole or part.
Chapter 22 – Investors and The Investment Process
INVESTORS AND THE INVESTMENT PROCESS
1. The investment objectives of the Masons should be expressed in terms of return and
risk. These return and risk preferences should be portrayed in terms of the Mason’s
preferences, their current financial status, and the stage in their life cycle.
Investment Objectives
Return Requirement: Dr. Mason is nearing retirement. Therefore, the overriding
objective is to provide the Masons with sufficient retirement income. This objective
should be easily satisfied by investing the original $1,000,000 payment from ACS to
Risk Tolerance: Given the substantial size of the Masons’ assets, this portfolio can
Investment Constraints
Liquidity: The substantial size of the Masons’ assets and the prospects for continued
Time Horizon: Because the Masons are in the later part of their life cycle, one would
Regulatory and Legal: Since this is a personal portfolio, regulatory and legal
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© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 22 – Investors and The Investment Process
Investment Policy
Given the Masons’ substantial assets, the investment policy should emphasize capital
appreciation and provide moderate current income. The large size of the portfolio allows
2.
a. Mature pension fund:
I nvestment Objectives
Return requirement: Return must exceed the fund’s actuarially assumed rate of
return based in part on the anticipated 5% rate for wage cost increases.
I nvestment Constraints
Liquidity: Proximity of payouts requires liquidity above that required for less
mature plans. This additional liquidity may limit returns.
b. Conservative endowment fund:
Investment Objectives
Return requirement: Return must meet or exceed 5% spending rate with3%
Investment Constraints
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Chapter 22 – Investors and The Investment Process
Liquidity: Budget needs will require some liquidity to meet expenses; this may
limit returns.
Time horizon: Budget considerations will require funding immediate needs but
inflation considerations require some attention to a longer-term growth
horizon.
c. Life insurance company specializing in annuities:
Investment Objectives
Return requirement: Return should exceed new money rate by sufficient
margin to meet expenses and profit objectives. Lower minimum accumulation
rate tempers return objective.
Investment Constraints
Liquidity: Some liquidity may be required for surrenders and rollover of funds
to protect against locking in noncompetitive rates.
CFA 1
Answer:
CFA 2
Answer:
CFA 3
Answer:
CFA 4
Answer:
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 22 – Investors and The Investment Process
CFA 5
Answer:
CFA 6
Answer:
CFA 7
Answer:
Investment Objectives
Return Requirement:Often, the return is stated in terms of minimum levels required to
Investment Constraints
Liquidity Requirements:The client’s need for cash or cash availability from securities
that can be sold quickly and without substantial price risk (concessions). Wood
Museum’s liquidity needs are a significant factor given the budget considerations.
Regulatory and Legal Considerations:In the case of an endowment fund, prudent-man
factors must be considered as well as the legal structure of the fund and any state or
federal regulation that might influence the management of the investment portfolio.
CFA 8
Answer:
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
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Chapter 22 – Investors and The Investment Process
Investment Objectives
Return Requirement: The fund should strive to provide a predictable stream of income
growing in line with the rising costs. An initial income target of 6% of portfolio assets
should enable the fund to support the hospital’s operating budget, while still favoring
future growth.
Investment Constraints
Liquidity: Liquidity needs are low. Except for investment reasons and periodic
payment of accumulated income, there is no reason to maintain any sizable liquid
reserves in the fund.
Unique Needs: Although the details provided concerning Good Samaritan are
somewhat sketchy, and additional information might be appropriately requested, it
CFA 9
Answer:
a. An appropriate investment policy statement for the endowment fund will be
organized around the following major and specific aspects of the situation:
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 22 – Investors and The Investment Process
A proposed IPS might be:
“The endowment fund’s investment assets shall be managed in a Prudent Man
context to provide a total return of at least 8% per year, including an original
$500,000 (5%) current income component growing at 3% annually. Meeting
b. The account circumstances will affect the initial asset allocation in the
following major ways:
i. The aggregate portfolio will have much larger than normal holdings of
ii. The aggregate portfolio will have much smaller than normal holdings of
iii. The equity portfolio will emphasize a growth orientation. Income in
iv. The aggregate portfolio risk level will be well below average. The 2014
v. The fund’s tax-exempt status maximizes allocation flexibility, both as to
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 22 – Investors and The Investment Process
vi. A short horizon to 2014 must be accommodated as to a major portion of
CFA 10
Answer:
a. Investment objectives are goals; investment constraints are the limits within
which the responsible party must operate in order to achieve the objectives;
investment policies define the ways in which the effort to achieve the
objectives will be undertaken.
An investment constraint is a limitation on the investment decision-making
which can be identified as a requirement in terms of liquidity, time horizon, tax
considerations, legal or regulatory considerations and unique needs. The
realism of both the investment objectives and the practical policies adopted for
a. Investment Objectives
Return: Total return equal to or greater than the foundation’s annual spending
plus the rate of inflation.
Investment Constraints
Time Horizon: Long-term (perpetuity).
b. Investment Policies
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 22 – Investors and The Investment Process
Equity Related Fixed Income
Common stocks and warrants Government and agency obligations
Convertible securities Corporate obligations
Option writing Real estate mortgages
In the case of convertible securities, corporate obligations and preferred stocks
carrying a credit rating, qualifying for purchase are securities rated no less than
The Office of the Treasurer shall have direct responsibility for no more than
50% of total marketable endowment funds. Remaining funds to be the
responsibility of outside managers as selected from time to time. All managers
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.