Reading 15: Managing Individual ....tor Portfolios －LOS k policy, investor, included, investment, individual

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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 k: Identify and explain each of the major constraint categories included in an individual investor's investment policy statement.

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With respect to the constraints portion of an investors investment policy statement, issues relating to on-going expenses, emergency reserves, alterations in on-going expenses, and transactions costs are all examples of:

A) liquidity issues.

B) time horizon issues.

C) tax considerations.

D) unique circumstances.

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Answer and Explanation

The issues listed in the stem of the question are concerned with the investors liquidity requirement.

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Which class of liquidity constraints is usually NOT considered a factor when formulating an individuals investment policy statement?

A) Ongoing expenses.

B) Cash carried on the person.

C) Emergency reserves.

D) Negative liquidity events.

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Answer and Explanation

The amount of cash an investor carries with them should not impact the investment policy statement. The primary liquidity constraints impacting the long-term policy statement are those cash outflows required in meeting ongoing expenses, emergency reserves, and negative liquidity events.

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Although legal and regulatory constraints do not usually impact an individual investors policy statement, attention must often be paid between two parties of personal trusts. Which parties exhibit the greatest tension in setting investment policy for a personal trust?

A) Income beneficiary and the trust officer.

B) Remaindermen and the trust officer.

C) Income beneficiary and remaindermen.

D) Grantor and remaindermen.

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Answer and Explanation

A creative tension exists between the income beneficiary and remaindermen listed in a personal trust. Income beneficiaries would like to have as much current income from the trust as possible. Remaindermen wish to have as large of a portfolio passed to them after the income beneficiary dies. The conflict between current income and longer-term portfolio growth is a situation that must be addressed in formulating investment policy for a personal trust.

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Vivian Collins is a client of ESP Financial Advisors. She presents her situation as follows: Collins is currently a divorced mother to a 5-year-old daughter, Daija. She is 35 years old. She has worked at her current job with the government for the last 13 years, and assumes that she will remain there until retirement and collect her pension. Collins wants to be able to send Daija to the college of her choice. Collins expects her daughter to eventually marry and have children. She would love to be able to leave something to these future grandchildren. How many time horizons does Collins have?

A) 5.

B) 3.

C) 4.

D) 6.

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Answer and Explanation

Collins has five distinct time horizons. The first is now until the time that Daija enrolls in college. The second is supporting Daija's college education. The third is her remaining years before retirement and after supporting Daija through college. Next is retirement. The last is her post-retirement planning for her future grandchildren.

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Which two constraints greatly impact an individuals investment policy statement?

A) Legal/regulatory and unique circumstances.

B) Legal/regulatory and tax considerations.

C) Legal/regulatory and liquidity concerns.

D) Time horizon and tax considerations.

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Answer and Explanation

Individual investors have finite lives and are taxable entities. Legal/regulatory factors may have an impact, but for the most part, individual investors can invest in almost any manner they please.