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Chapter 22 - Investors and The Investment Process
CHAPTER 22
INVESTORS AND THE INVESTMENT PROCESS
1.
a. Mature pension fund:
Investment 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.
mix and quality.
b. Conservative endowment fund:
Investment Objectives
Return requirement: Return must meet or exceed 5% spending rate with 3%
inflation rate. Return can be from income or capital gains but budget
horizon.
Chapter 22 - Investors and The Investment Process
Tax considerations: Non-taxable.
Regulatory and legal: State regulation.
It would also be important to recognize the dichotomy of objectives of the
tolerance may be required, but certainty of return and avoidance of
reinvestment rate risk virtually mandates the use of an immunized fixed
income portfolio.
Investment Constraints
Liquidity: Some liquidity may be required for surrenders and rollover of funds
Chapter 22 - Investors and The Investment Process
CFA 1
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
provide a moderate current income level. This income, combined with the Masons’
Social Security and pension benefits, will provide sufficient retirement income.
Risk Tolerance: Given the substantial size of the Masons’ assets, this portfolio can
tolerate a larger amount of risk than is normal for a family in the later stage of their
life cycle. Coupled with the Masons’ retirement benefits, a moderate income from the
Investment Constraints
Liquidity: The substantial size of the Masons’ assets and the prospects for continued
high royalty income lessen the importance of the liquidity constraint. A major portion
of the portfolio should be invested in relatively non-liquid assets in order to achieve
long-term capital growth.
Chapter 22 - Investors and The Investment Process
property, provides tax deductions that might also be desirable, and rental income would
supplement common stock dividends to provide the moderate current income required.
Investment Policy
CFA 2
Answer:
CFA 3
Answer:
CFA 4
Answer:
CFA 5
Answer:
CFA 6
Answer:
CFA 7
Answer:
CFA 8
Answer:
Chapter 22 - Investors and The Investment Process
Investment Constraints
CFA 9
Answer:
Chapter 22 - Investors and The Investment Process
CFA 10
Answer:
Chapter 22 - Investors and The Investment Process
b. The account circumstances will affect the initial asset allocation in the
following major ways:
iv. The aggregate portfolio risk level will be well below average. The 2017
payout requirement dictates a zero risk posture on a large part of the total
CFA 11
Answer:
a. Investment objectives are goals; investment constraints are the limits within
which the responsible party must operate in order to achieve the objectives;
Chapter 22 - Investors and The Investment Process
b. Investment Objectives
Return: Total return equal to or greater than the foundation’s annual spending
plus the rate of inflation.
c. Investment Policies
A portfolio balance, to be averaged over time, of a maximum position of 67%
in equity-type investments and a minimum position of 33% in fixed income
type investments.
