Reading 15: Managing Individual ....tor Portfolios －LOS m strategic, investment, individual, allocation

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 4: Private Wealth Management
Reading 15: Managing Individual Investor Portfolios
LOS m: Determine the strategic asset allocation that is most appropriate for an individual investors specific investment objectives and constraints.

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The process of elimination can be used to arrive at an individuals asset allocation. Which step is often considered the first hurdle in the elimination process?

A) Return objective.

B) Risk objective.

C) Liquidity constraint.

D) Unique consideration.

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Answer and Explanation

The first step in the elimination process is to select those allocations that at least meet the real after-tax total return objective of the investor. Once that step is completed, then other considerations are addressed.

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After selecting allocations based on a return objective criterion, the process of elimination for selecting the appropriate individual investor allocation can next use which of the following factors?

A) Liquidity constraint.

B) Risk objective.

C) Legal and regulatory constraints.

D) Unique considerations.

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Answer and Explanation

Once the return objective has been met, eliminating allocations via the risk objective can be accomplished.

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If more than one allocation exists after elimination via return and risk criteria, the advisor then can eliminate those that do NOT meet an individuals:

A) acquaintance recommendations.

B) brokerage recommendations.

C) familial heritage.

D) unique considerations.

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Answer and Explanation

Unique preferences and other considerations should be used to eliminate those allocations that are inappropriate beyond risk and return objectives. These unique preferences may be related to statements made about what type of securities an individual does not desire holding or some desired liquidity level not already considered explicitly in the liquidity constraint. Any indication as to inappropriateness can be used to eliminate all but the most appropriate allocation.