Reading 15: Managing Individual ....tor Portfolios －LOS g formal, benefits, potential, having, investment

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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 g: Explain the potential benefits, for both clients and investment advisers, of having a formal investment policy statement.

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Larry Smith, CFA, is the new equity portfolio manager for a socially responsible mutual fund. The investment policy statement stipulates which stocks do not meet the funds definition of socially responsible. Because Smith was new to the fund, he did not personally agree to the stocks that were forbidden. Subsequently, he included a stock into the portfolio that was on the restricted list. Which of the following statements is FALSE?

A) Smith is to be held responsible for the investment policy statement even though it was written before he was employed at the fund.

B) The fund should have a dispute resolution clause included in its investment policy statement.

C) Smith was responsible for reading and understanding the investment policy statement prior to stock selection.

D) Smith did not violate the investment policy statement.

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Answer and Explanation

Smith is in clear violation of the funds investment policy statement. Just because he is new to the fund, does not exempt him from following the statement. Most investment policy statements contain a stated review process that provides direction for dispute resolution.

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Which of the following statements concerning an investors policy statement is FALSE? The investment policy statement:

A) should represent the long-term objectives of the investor.

B) should identify constraints that are relevant to the investor.

C) determines the client's ability and willingness to take risk.

D) provides guidance to the investment advisor regarding issues of appropriateness of decisions.

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Answer and Explanation

The investment policy statement does not determine the clients ability and willingness to take risk. These are a function of the clients situation and personality type. The IPS should, however, discuss the clients willingness and ability to take risk.

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Clients can benefit from an investment policy statement which:

A) provides for legal recourse due to portfolio underperformance.

B) provides long-term investment discipline deterring short-term knee-jerk portfolio adjustments.

C) dictates how to spend extra liquidity.

D) creates a portfolio where the returns are tax-free.

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Answer and Explanation

The purpose of an investment policy statement is to provide long-term discipline in investment decision making. The investment policy statement protects against short-term portfolio adjustments resulting from investor panic or overconfidence.

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An investment policy statement benefits investment advisors because it provides:

A) guaranteed legal protection against errors in omission lawsuits.

B) exact details for specific security selection.

C) guidelines for capital market expectation formations.

D) an understanding of the advisory relationship between manager and client.

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Answer and Explanation

The investment policy statement provides an understanding of the relationship between manager and client. The investment policy statement does not provide guaranteed legal protection, exact details for security selection, or how to form capital market expectations.

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An investment policy statement does NOT provide which of the following?
 

A) Long-term investment decision making guidelines.

B) Evaluation of investor objectives and constraints.

C) Guaranteed investment returns.

D) Weighting ranges for asset allocation.

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Answer and Explanation

An investment policy statement does not provide guaranteed investment results.
  

[此贴子已经被作者于2008-9-16 18:26:50编辑过]