标题: Managing Institutional Investor Portfolios －LO [打印本页]
作者: cfaedu 时间: 2008-9-17 13:52 标题: [2008] Session 5－Reading 21: Managing Institutional Investor Portfolios －LO
CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 5: Portfolio Management for Institutional Investors
Reading 21: Managing Institutional Investor Portfolios
LOS i: Compare and contrast the investment objectives and constraints of foundations, endowments, insurance companies, and banks.
作者: cfaedu 时间: 2008-9-17 13:58
Following completion of the return objectives, Simon proofs the remaining sections of Exhibit A. For foundations, which of the remaining sections are NOT correct? A) | Time horizon, tax, liquidity & income. |
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| B) | Risk tolerance, time horizon, legal & regulatory. |
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| C) | Risk tolerance, liquidity & income, legal & regulatory. |
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| D) | Tax, liquidity & income, unique constraints. |
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Answer and Explanation
Foundations often have finite lives whereas endowments typically have infinite horizons. Private foundation investment income is taxable, whereas community foundations and endowments are not. Private foundations are required to pay out at least 5 percent of assets on an annual basis. Endowments do not have minimum spending requirements. Foundations may also be able to decrease grant-making activity if investment returns have declined, in contrast to most endowments that need stable, inflation-protected income, and sufficient liquidity to fund the ongoing operations of a specific entity. The risk tolerance of endowments is generally lower than foundations due to short-term budgetary needs (income and liquidity) of the sponsored organization, but can vary due to other factors such as the risk tolerance of the trustees/investment committee, the size of the principal, long-term return goals, etc. Foundation risk tolerance is critically linked to time horizon, but is also influenced by the risk tolerance of the board, principal size, etc. However, foundations are often more aggressive than endowments. Unique constraints may vary widely, but social investing is a typical concern of foundations and endowments.
The risk tolerance of endowments is generally lower than foundations due to short-term budgetary needs (income and liquidity) of the sponsored organization, but can vary due to other factors such as the risk tolerance of the trustees/investment committee, the size of the principal, long-term return goals, etc. Foundation risk tolerance is critically linked to time horizon, but is also influenced by the risk tolerance of the board, principal size, etc. However, foundations are often more aggressive than endowments. Unique constraints may vary widely, but social investing is a typical concern of foundations and endowments.
Which of the following best describes the major difference between the time horizon constraint of a foundation and of an endowment? | A) | Foundations may have an infinite life, whereas endowments always have finite lives. |
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| B) | Endowments and foundations both have infinite lives. |
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| C) | Endowments and foundations both have finite lives. |
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D) | Foundations may have a finite life, whereas endowments typically have infinite lives. |
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Answer and Explanation
Foundations often have finite lives whereas endowments are generally established for infinite time horizons.
A publicly-sponsored organization that makes grants for charitable, religious, social or educational purposes is a (an): |
| B) | private or family foundation. |
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| C) | company-sponsored foundation. |
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Answer and Explanation
Community foundations are publicly-sponsored entities with boards consisting of community representatives. Community foundations have no annual spending requirements. Other types of foundations may also be organized to fund charitable, social educational or religious purposes, but are not public-sponsored or operated. Endowments are not generally grant-making entities.
Which of the following most accurately depicts the tax treatment of a private foundation and an endowment? | A) | Endowment investment income is taxable, whereas private foundation investment income is not. |
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| B) | Community foundation investment income is taxable, whereas endowment investment income is not. |
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| C) | Operating foundation investment income is taxable, whereas endowment investment income is not. |
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D) | Private foundation investment income is taxable, whereas endowment investment income is not. |
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Answer and ExplanationPrivate foundation investment income is taxable, whereas the income of other foundations and endowments is generally not taxable.
With respect to Graingers and Simons statements concerning the spending policies of the different types of foundations: | A) | Grainger is incorrect; Simon is incorrect. |
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| B) | Grainger is correct; Simon is incorrect. |
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| C) | Grainger is incorrect; Simon is correct. |
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D) | Grainger is correct; Simon is correct. |
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Answer and Explanation
Both Grainger and Simon are correct. Independent (private and family foundations are independent foundations), operating, and company-sponsored foundations are subject to minimum spending requirements of some kind. Community foundations are not. Although Simon did not mention operating and company-sponsored foundations, his statement is still correct.
作者: cfaedu 时间: 2008-9-17 14:06
Distinguishing characteristics between regular foundations, private foundations, and endowments are:
| A) | endowments must generate their entire operating budget from portfolio assets, and private foundations are required to pay out a minimum of 5 percent of assets annually. |
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| B) | foundations must generate their entire operating budget from portfolio assets, and endowments are required to pay out a minimum of 5 percent of assets annually. |
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C) | foundations usually generate their entire operating budget from portfolio assets, and private foundations are required to pay out a minimum of 5 percent of assets annually. |
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| D) | endowments must generate their entire operating budget from portfolio assets, and endowments are required to pay out a minimum of 5 percent of assets annually. |
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Answer and Explanation
Foundations usually generate their entire operating budget from portfolio assets, and private foundations are required to pay out 5 percent of assets annually.
作者: cfaedu 时间: 2008-9-17 14:10
Endowment investment policy statements usually pay attention to the liquidity constraint determined by spending requirements. Which of the following statements most accurately represents an endowments relationship to spending? Endowments:
A) | use spending rules to minimize spending volatility. |
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| B) | use spending rules to maximize spending. |
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| C) | use spending rules to maximize asset consumption. |
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| D) | no longer use spending rules to estimate spending levels. |
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Answer and Explanation
To minimize adverse impacts of spending volatility, endowments often employ spending rules that tend to minimize spending level volatility.
作者: cfaedu 时间: 2008-9-17 14:11
A life insurance companys liquidity requirement differs from a non-life insurance companys requirement in that a life insurance companys liability structure is uncertain in its:
| A) | amount, while a non-life insurance company's liability structure is uncertain in both its amount and timing. |
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| B) | timing and amount, while a non-life insurance company's liability structure is also uncertain in its amount and timing. |
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| C) | amount, while a non-life insurance company's liability structure is uncertain in its amount. |
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D) | timing, while a non-life insurance company's liability structure is uncertain in both its amount and timing. |
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Answer and Explanation
Life insurance companies have liability structures that are uncertain in timing but not amount. Non-life insurance companies have liability structures that are uncertain in both amount and timing.
作者: cfaedu 时间: 2008-9-17 14:12
Which of the following statements concerning foundations and endowments is TRUE?
| A) | Foundations are grant-making institutions and may have variable time horizons; endowments are established to permanently fund some activity, and typically have minimum payout requirements. |
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| B) | Foundations are established to permanently fund some activity and have high degrees of risk tolerance. |
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C) | Foundations are grant-making institutions and may have variable time horizons; endowments are established to permanently fund some activity, and typically have infinite lives. |
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| D) | Endowments are grant-making institutions and typically have low degrees of risk tolerance. |
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Answer and Explanation
Foundations are grant-making institutions and may have short or long (infinite) lives. Endowments are established to permanently fund some activity (e.g., provide scholarships) and typically have infinite lives. Endowments typically do not have minimum payout requirements. Both types of institutions typically have fairly high degrees of risk tolerance if they are long-lived.
作者: cfaedu 时间: 2008-9-17 14:12
The primary reason for an endowment to establish a spending rule is to:
| A) | minimize variance in portfolio value. |
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| B) | enhance long-term protection of principal. |
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C) | minimize spending fluctuations. |
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| D) | ensure the cash flows of the endowment maintain their purchasing power. |
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Answer and Explanation
The primary reason for the establishment of a spending rule is to minimize spending fluctuations, since large fluctuations will undermine the objective of the endowment. The spending rule is typically based on portfolio value, but does not minimize variance in the value. Spending rules can affect the long-term value of the principal and the purchasing power, but these are secondary objectives in the establishment of a spending rule.
作者: cfaedu 时间: 2008-9-17 14:14
Compared to the average time horizon of his current clients, the time horizon of the investment company and endowment fund will be: | Investment Co. | Endowment Fund |
Answer and ExplanationBoth the endowment and investment company would have longer horizons than Monarchs current clients. Institutions generally have longer horizons than individuals, and this is especially true given that Monarchs clients are retired or near retirement.
Which of the three situations (his current clientele, the investment company, or the endowment fund), would have the fewest tax considerations? |
| B) | The investment company. |
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| D) | There is no clear answer. |
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Answer and Explanation
An endowment fund does not have to consider taxes. Although, an investment company manager is judged primarily on the total pretax return, the public is paying increasing attention to the tax implications of funds with high turnover rates.
Which of the three situations (his current clientele, the investment company, or the endowment), would require the most attention to generating a positive alpha? |
B) | The investment company. |
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| D) | There is no clear answer. |
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Answer and Explanation
Alpha is a standard criterion for measuring the success of an investment company. Although alpha could be used to measure Monarchs success as the endowment manager, the endowment has other criteria such as loss aversion and social consciousness. Thus, alpha would not be the primary focus. Persons that are retired or near retirement have many priorities that exceed alpha in importance.
With respect to the statements made by Monarch and Linn comparing foundations and endowments: | A) | Monarch is incorrect about taxes and incorrect about functions; Linn is correct about taxes and correct about functions. |
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B) | Monarch is incorrect about taxes and correct about functions; Linn is correct about taxes and incorrect about functions. |
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| C) | Monarch is correct about taxes and correct about functions; Linn is incorrect about taxes and incorrect about functions. |
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| D) | Monarch is correct about taxes and incorrect about functions; Linn is incorrect about taxes and correct about functions. |
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Answer and Explanation
Foundations are subject to excise taxes between1-2% on net investment income. Any unrelated business income is exposed to regular corporate tax rates. In addition to grant-making, foundations can be primary sources of ongoing funding for charitable programs.
Monarch thinks he might be questioned about the predictive power of an investment managers past performance. Which of the following factors is least likely to help when projecting how well a manager will do in the future is: | A) | whether the performance was evaluated relative to a style benchmark. |
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| B) | what time frame was used to measure performance. |
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C) | the managers nominal return. |
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| D) | the consistency of the managers performance. |
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Answer and Explanation
The nominal return itself provides limited information for gauging a managers future success. Risk-adjusted returns and returns relative to a style or index benchmark are more useful. Other important factors to consider are the investment process, who the investment decision-makers are, the time frame, the presence of dependable staff, the size of the portfolio, and the consistency of the performance.
作者: cfaedu 时间: 2008-9-17 14:17
The return objectives for a life insurance company can be broken into two segments, the fixed-income and the surplus segments. Which return objectives are mostly associated with each segment, respectively?
| A) | Spread management and maximizing yield. |
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B) | Spread management and capital gains. |
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| C) | Yield maximization and spread management. |
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| D) | Capital gains and yield maximization. |
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Answer and Explanation
The return objectives for a life insurance company have mainly been associated with earning a competitive return that helps increase the spread between assets and liabilities. The surplus portfolio, however, has growth in the surplus as its main return objective, which will happen via capital gains.
作者: cfaedu 时间: 2008-9-17 14:19
The time horizon of a non-life insurance company differs from that of a pension fund in that a nonlife insurance companys time horizon:
| A) | is quite long due to the uncertainty of the liability structure associated with policies sold, whereas a pension fund's time horizon will be much shorter due to the finite life of employees. |
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B) | may be quite short and will depend upon the characteristics of policies sold, whereas a pension fund's time horizon may be much longer, depending on workforce characteristics. |
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| C) | is dependent on the uncertainties of policies sold, whereas the time horizon of a pension fund is a direct consequence of the business cycle. |
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| D) | is not dependent on the business cycle, whereas a pension fund's time horizon is directly related to the business cycle. |
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Answer and Explanation
Due to the uncertainty associated with the characteristics of policies sold and when claims will be paid, the time horizon of a nonlife insurance company will necessarily be short. A pension fund, however, will have a time horizon typically longer than that of a nonlife insurance company. The pension funds time horizon will be directly related to the plan sponsors workforce characteristics.
作者: cfaedu 时间: 2008-9-17 14:19
The risk tolerance of a foundation differs from that of the fixed-income segment of a life insurance company in which of the following ways? The risk tolerance of a foundation:
A) | will typically be much greater than that of the fixed-income segment of a life insurance company. |
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| B) | will typically be much less than that of the fixed-income segment of a life insurance company. |
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| C) | and that of the fixed-income segment of a life insurance company will both be relatively high. |
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| D) | and that of the fixed-income segment of a life insurance company will both be relatively low. |
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Answer and Explanation
The fixed-income segment of a life insurance companys portfolio will essentially be dedicated to providing competitive returns in meeting the liabilities attached to policies sold. Hence, the risk tolerance associated with the fixed-income segment of a life insurance company will typically be less than that of a foundation, which usually has a moderate to high risk tolerance depending on spending rates.
作者: cfaedu 时间: 2008-9-17 14:20
Which of the following are characteristics of public foundations and endowments liquidity needs, respectively?
Answer and Explanation
A foundation determines what its spending needs are, which thereby causes liquidity to vary for each foundation. Liquidity is low for endowmentsusually only for emergencies and spending.
作者: cfaedu 时间: 2008-9-17 14:22
Ed Simon, CFA, has been assigned the arduous task of assessing the slight nuances concerning the investment objectives and constraints for foundations and endowments. Simons supervisor has requested a full report on these differences and how they affect the investment policy statements.
Simon thought it best to first look at differences in return objectives between foundations and endowments. Which of the following best indicates differences between the return objectives of foundations and of endowments?
| A) | Foundation return objectives are to provide a permanent base of funding whereas endowment return objectives depend on the time horizon of the endowment. |
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B) | Foundation return objectives depend on the time horizon of the foundation, whereas endowment return objectives are to provide a permanent base of funding. |
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| C) | Endowment returns usually are dictated by a rule-of-thumb of "5.3% + inflation," whereas foundation return objectives are dictated by spending rules. |
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| D) | Neither foundation nor endowment return objectives focus much on purchasing power preservation. |
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Answer and Explanation
Foundations may be finite-lived entities, but endowments are created to provide a permanent base of funding.
Simon next turned his attention to the differences in risk objectives between foundation and endowment investment policy statements. Which of the following best describes the main difference between foundation and endowment risk objectives?
| A) | Foundation risk tolerance is dependent on the importance of foundation funds in the sponsor's overall budget picture, while endowment risk tolerance is dependent on the time horizon of the endowment. |
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B) | Foundation risk tolerance is dependent on the time horizon of the foundation, whereas endowment risk tolerance is dependent on the importance of the endowment fund in the sponsor's overall budget picture. |
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| C) | Endowment risk tolerance is not dictated by the relationship between the current income requirement and maintenance of purchasing power, whereas this is a crucial factor for foundations. |
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| D) | Inflation rarely impacts the risk tolerance of either foundation or endowment. |
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Answer and Explanation
Risk tolerance of foundations is critically linked to any time horizon structure while endowment risk tolerance is dependent on the importance of endowment funds in a sponsors overall budget picture.
Foundations and endowments often have differential liquidity constraints. Simon found which of the following to be a difference between the liquidity constraints of a foundation and an endowment?
A) | Private foundations are required to have a minimum spending rate whereas endowments rarely have minimum spending rates. |
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| B) | Endowments are required to have a minimum spending rate whereas private foundations rarely have minimum spending rates. |
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| C) | An endowment's spending rule will have less of an effect on liquidity requirements than a foundation's liquidity requirement due to a minimum spending rate. |
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| D) | A foundation's spending rule will have less of an effect on liquidity requirements than an endowment's liquidity requirement due from a minimum spending rate. |
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Answer and Explanation
Private foundations are required to pay out at least 5 percent of assets on an annual basis. Endowments do not have minimum spending requirements.
Simon discovered tax laws seem to differentially impact foundations and endowments. Which of the following most accurately depicts the differential tax treatment between foundations and endowments?
A) | Private foundation investment income is taxable, whereas endowment investment income is not. |
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| B) | Endowment investment income is taxable, whereas private foundation investment income is not. |
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| C) | Community foundation investment income is taxable, whereas endowment investment income is not. |
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| D) | Operating foundation investment income is taxable, whereas endowment investment income is not. |
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Answer and Explanation
Private foundation investment income is taxable, whereas other foundations and endowments are not.
作者: cfaedu 时间: 2008-9-17 14:22
Which of the following statements best compares the legal and regulatory constraints when managing a pension plan versus managing an endowment fund?
A) | Pension plans are managed by the Employee Retirement Income Security Act while endowment funds are governed by the Uniform Management Institutional Funds Act. |
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| B) | Endowment funds are managed according to the "prudent expert" rule while benefit plans are managed under the "prudent investor" rule. |
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| C) | Both endowment and pension plans are highly regulated by Federal governmental agencies. |
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| D) | State pension laws generally supersede Federal pension laws regarding pension plans whereas endowment funds are primarily regulated at the Federal level. |
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Answer and Explanation
With respect to the legal and regulatory constraints, pension plans are regulated by the Employee Retirement Income Security Act (ERISA) while endowment funds are governed by the Uniform Management Institutional Funds Act (UMIFA).
Pension plans are held to a higher standard known as the prudent expert rule which states that ERISA fiduciaries must discharge their duties with care, skill, prudence, and diligence under circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character and aims.
By diversifying the investments of the plan we minimize the risk of large losses.
Endowment plans are held to a standard known as the prudent investor rule, which states that fiduciaries must adhere to fundamental duties of loyalty, impartiality and prudence as well as maintain overall portfolio risk at a reasonable level and provide for the reasonable diversification of investments.
Fiduciaries must also act with prudence in deciding whether and how to delegate authority to experts and in selecting and supervising agents.
With respect to the legal and regulatory constraints, pension plans are regulated by the Employee Retirement Income Security Act (ERISA) while endowment funds are governed by the Uniform Management Institutional Funds Act (UMIFA).
Pension plans are held to a higher standard known as the prudent expert rule which states that ERISA fiduciaries must discharge their duties with care, skill, prudence, and diligence under circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character and aims.
By diversifying the investments of the plan we minimize the risk of large losses.
Endowment plans are held to a standard known as the prudent investor rule, which states that fiduciaries must adhere to fundamental duties of loyalty, impartiality and prudence as well as maintain overall portfolio risk at a reasonable level and provide for the reasonable diversification of investments.
Fiduciaries must also act with prudence in deciding whether and how to delegate authority to experts and in selecting and supervising agents.
作者: cfaedu 时间: 2008-9-17 14:23
Banks tend to use their investment portfolios for all of the following objectives EXCEPT:
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B) | creating off balance sheet opportunities. |
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| C) | decreasing credit exposure. |
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| D) | mitigating interest rate risk. |
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Answer and Explanation
This is not an objective of a banks investment portfolio. All others are.
作者: cfaedu 时间: 2008-9-17 14:24
Which of the following is a potential shortcoming of a banks propensity to invest in low risk securities? Not enough funds invested in:
Answer and Explanation
Low risk securities carry low (or no) risk weightings, which require no capital to support the investment. Loans are a core function of banking, but, as they are considered high risk, they require capital to support the investment. Unbalanced investments in low risk securities and not in loans are problematic because of the potential mismatch between cash inflows on assets and outflows on liabilities.
作者: cfaedu 时间: 2008-9-17 14:25
Assessing the capital risk position is relevant to the investment management process at a bank because it indicates the appropriate amount of:
| A) | credit weighted assets. |
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| C) | marketability weighted assets. |
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| D) | liquidity weighted assets. |
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Answer and Explanation
Assessing a banks capital risk position indicates the level of capital that must be held by the bank to support investment activities.
作者: cfaedu 时间: 2008-9-17 14:25
Which of the following represents the most appropriate objective found in a banks investment portfolio?
| A) | Assist with generating income-only profits. |
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B) | Assist with increasing after-tax income. |
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| C) | Assist with generating capital gains-only profits. |
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| D) | Assist with generating municipal securities only profits. |
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Answer and Explanation
The most appropriate objective is to increase after-tax income, not only profits associated with income, capital gains, or municipal securities.
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