Reading 54: Basics of Portfolio Planning and Construction-LO 2011, investment, regulatory, factors, assets

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Session 12: Portfolio Management
Reading 54: Basics of Portfolio Planning and Construction

LOS e: Describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances and their implications for the choice of portfolio assets.

 

 

Which of the following should least likely be included as a constraint in an investment policy statement (IPS)?

A) Constraints put on investment activities by regulatory agencies.

B) How funds are spent after being withdrawn from the portfolio.

C) Any unique needs or preferences an investor may have.

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How funds are spent after withdrawal would not be a constraint of an IPS.

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Which of the following statements about investment constraints is least accurate?

A) Diversification efforts can increase tax liability.

B) Investors concerned about time horizon are not likely to worry about liquidity.

C) Unwillingness to invest in gambling stocks is a constraint.

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Investors with a time horizon constraint may have little time for capital appreciation before they need the money. Need for money in the near term is a liquidity constraint. Time horizon and liquidity constraints often go hand in hand. Diversification often requires the sale of an investment and the purchase of another. Investment sales often trigger tax liability. Younger investors should take advantage of tax deferrals while they have time for the savings to compound, and while they are in their peak earning years. Many retirees have little income and face less tax liability on investment returns.

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Which of the following is least likely to be considered a constraint when preparing an investment policy statement?

A) Liquidity needs.

B) Risk tolerance.

C) Tax concerns.

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The constraints are: liquidity needs, time horizon, taxes, legal and regulatory factors, and unique needs and preferences. Risk tolerance is included in the investment objectives of the policy statement, not in the constraints.

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All of the following are investment constraints EXCEPT:

A) tax concerns.

B) liquidity needs.

C) pension plan contributions of the employer.

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Investment constraints include: liquidity needs, time horizon, tax concerns, legal and regulatory factors and unique needs and preferences. While employer contributions may be of interest, and an issue in some instances, it is not classified as a specific investment constraint.