Reading 70: The Portfolio Management Process and the Investm allocation, 2011, Investment, class, investment

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Session 18: Portfolio Management: Capital Market Theory and the Portfolio Management Process
Reading 70: The Portfolio Management Process and the Investment Policy Statement

LOS e: Explain how capital market expectations and the investment policy statement help influence the strategic asset allocation decision, and discuss how an investor's investment time horizon may influence the investor's strategic asset allocation.

 

 

Horace Cline buys large-cap stocks and shorts S& 500 Index futures. What investment strategy does Cline practice?

A) Growth.

B) Semi-active.

C) Active.

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Cline uses index futures, but that does not make him an indexer. By purchasing stocks and shorting the index, Cline is trying to take the index’s movements out of the equation, leveraging the alpha from his stock picks. He is an active manager. We do not have enough information to determine whether Cline is a growth or value investor.

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Karen Mogdans is a money manager working on an account for Jim Howell. In order to channel Mogdans’ knowledge of the risk and return characteristics of different asset classes into a strategic asset allocation for Howell, she needs:

A) a return target.

B) a rebalancing strategy.

C) an investment policy statement (IPS).

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Mogdans has expertise on different asset classes, suggesting she is also knowledgeable about the market’s risk characteristics. The rebalancing strategy will be developed at the same time as the asset allocation, or perhaps afterward. It won’t help create the allocation. And while Howell’s return target is important, it must be considered in the context of his risk tolerance, portfolio constraints, etc. The IPS contains data needed for a knowledgeable manager to structure a portfolio suitable for an individual investor.

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A money manager who crafts portfolios using all of Standard & Poor’s sector index exchange traded funds (ETFs), aggressively overweighting and underweighting sectors, follows what investment strategy?

A) Active.

B) Semi-active.

C) Passive.

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Semi-active strategies involve using indexes as the underlying investments, but trying to add value through some active management. In this case, the manager starts with index ETFs, but actively adjusts the allocation. He is a semi-active manager.