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Investment, Security And Portfolio Management

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Investment, Security And Portfolio Management

Postby ezri » Sun Dec 04, 2016 10:04 am

Dear Sir,

Please help me to solve these questions.

1.   Assume that you are a dealer of NSE and BSE. If an investor or group of investors approaches you for a valuable advice of investing several lakhs through your dealership network what will be your advice? Explain the strategies.

2.   How would you characterize the behaviour of the stock during the period [e.g., aggressive, neutral, defense, etc.] relative to the market? State why, in terms of : a. Underlying statistical relationships, and b. Company basics [e.g. products, services, operations and financing]

3.   Imagine that the stock market has been declining. A technician is looking for signs of an upturn in the market. What sorts of readings should he be expecting from

a.   Breadth of the market

b.   Volume of trading c.   Odd-lot trading d.   Short - selling

4.   You are attempting to construct an optimum portfolio. Over your holding period, you have forecasted an expected return on the market of 13.5 percent with a market variance of 25 percent. The Treasury security rate available is 7 percent [risk-free]. The following securities are under review:


Boeing      3.72      0.99      9.35          

Bristol-Myers   0.60      1.27      5.92          

Browning-Ferris   0.41      0.96      9.79          

Emerson Electric   -0.22      1.21      5.36          

Mountain States Telephone   0.45      0.75      4.52

With warm regards


Posts: 39
Joined: Fri Apr 01, 2011 11:19 am

Investment, Security And Portfolio Management

Postby Bidziil » Tue Dec 06, 2016 6:10 pm




[email protected]

I  will send  the balance  asap.




1.Assume that you are a dealer of NSE and BSE. If an investor or group of investors approaches you for a valuable advice of investing several lakhs through your dealership network what will be your advice? Explain the strategies.    PPORTFOLIOThriving under RDR

Thriving, not just surviving, under-RDR will require a robust and

systematic investment advice process. Such a process can help you to:

„„ Have more satisfied clients.

„„ Build greater business value.

„„ Avoid creating business risks.

This guide introduces the basic concepts needed to help you develop a

process based on lessons learned from thriving fee-based advisers both

here in the UK and in other countries with many years’ experience with

fee-based advice models. 6

Thriving under RDR

Thrive, don’t just survive

The Retail Distribution Review(RDR)

signals a significant opportunity for

prepared advisers. Adopting a systematic

approach to financial planning and

portfolio construction offers you the

opportunity to add value that is not solely

dependent on investment performance,

which is often outside your control.

Control regulatory and legal risk

Taking a structured and disciplined

approach to the investment advice

process can avoid a build-up of risk

within the practice – risk which isn’t

always visible. A systematic process

leads to transparent and consistent

client outcomes, which helps to manage

risk because you can demonstrate the

systems and controls to the regulator and

your clients.

Use your process to sell your


Rather than an onerous chore, having a

process in place actually helps you sell

your service. With trust at a premium in

the financial services, being able to show

your clients that you have a rigorous

process which helps control risk and

systemised investment planning will go

far to help build that trust.

Create long-term business value

Having a systematic investment planning

process can result in sustained value

creation for an advice practice. If you

base your client proposition on goals and

outcomes which are within your control

– rather than investment performance,

which isn’t – it’s more likely to lead to

satisfied clients, willing to pay ongoing

fees for long-term advice. And having

satisfied and engaged clients leads

directly to long-term business value.

See our six-part series called Creating a

successful fee-based advice practice for

an in-depth discussion of how to create

long-term business VALUE.

S Consistency requires strong

organising beliefs

You should be able to demonstrate to

clients and regulators alike that you have

a strong investment philosophy in place,

based on research and knowledge,

showing that you are working to that

belief system in the interests of clients.

You should be able to demonstrate

with an objective process/framework/

motivation how you arrived at a given

investment plan and populated it with

certain investment products. ‘Statement of Investment


You can use a formal ‘Statement of

Investment Principles’ to set out your

firm’s beliefs and approach to investment

management. In other words, how you

assess risk, allocate assets, choose

managers and review portfolios.

The point of this document is consistency

across client experiences and adviser

practice. Clients should experience a

firm, not an individual adviser. If they

moved from one adviser to another

within the firm, they should get exactly

the same outcome from the process.

The individual client’s investment plan

would then explain how your firm applies

these principles to that client’s unique


See the appendix, pp. 52-53, for an

example ‘Statement of Investment

Principles’. KNOW  YOUR  CLIENT   WELL

„„Review of client’s financial position

„„History, values, transitions goals

„„Goals-based planning DEVELOP A  PLAN  

„„Categorise and evaluate

„„Determine risk/return requirements

„„Develop a written plan CONSTRUCT  A  PORTFOLIO

„„Strategic asset allocation

„„Sub-asset allocation

„„Passive/active mix

„„Asset location

„„Manager selection IMPLEMENT   PLAN

„„Best execution

„„Tax efficient trading

„„Automate rebalancing MONITOR   PROGRESS

„„Periodic financial check ups

„„Significant life events

„„Review progress 1. Know your client In a comprehensive and systematic process, this requires that you understand your clients’ ‘real intent’. Financial planning

exists to help people meet specific life goals and it’s your job to understand them and help clients achieve them.

2. Develop a plan The planning stage involves formulating a comprehensive financial plan based on the goals and risk profile of the client.

This needs to be written down and agreed with the client.

3. Construct a portfolio With a clear understanding of your clients’ goals and profile, a systematic process calls for a top-down approach to

portfolio construction, starting with strategic asset allocation, through to manager selection. 4. Implement the plan Implementing the plan can then be fairly automated to ensure best execution, tax efficient trading and scheduled

rebalancing to avoid the portfolio drifting out of alignment with the client’s goals and risk profile.

5. Monitor progress Regular check ups and progress reviews ensure that the plan stays on track. Should anything change, such as a

significant life event, the process might start over by checking against the goals and life situation, and a subsequent

adjustment of the financial plan. But remember, if it’s not broken, stay the course! 1. Know your client

A solid client/adviser relationship rests on mutual understanding.

This starts with an in-depth evaluation of the client’s situation, where

they’ve been and what they really want to achieve financially. For

example, not many clients yearn to own a pension, but they do want

the financial independence that a properly funded pension will bring. Part 1: Establishing the adviser relationship All relationships are based on trust and knowledge. Changing your clients’ perception

of you from service provider to trusted financial partner requires the highest level of

client knowledge. The most successful fee-based practices ask just as many qualitative

questions as they do quantitative ones. They seek to find out their clients’ real intent, not

just their financial intent. While this may not suit all advisers’ style, the most successful

firms use these questions to demonstrate to their clients that they understand them as

people, not just their finances. They put in practice the knowledge that trust is the basis

of any long-term relationship.

tart          with a set of guiding principles Start with a set of guiding principles Start with a set Try asking one or more of these questions

to spark a conversation with your client.

You may be surprised by what you learn.

„„What was money like growing up?

„„How do you define financial success?

„„What is the biggest financial concern

you are facing in your life right now?

„„What is a goal you have yet to


The resulting conversation can be

incredibly insightful and begin to build the

kind of mutually satisfying adviser / client

relationship that will benefit both you and

your clients. Moving to the role of trusted

adviser requires a deeper examination

of your clients’ lives from a number of

different perspectives as outlined on the

following pages. Life history

Life history has always played a dominant

role in shaping individual attitudes. In

fact, most individual attitudes and beliefs

about money are shaped by childhood

experiences. What people, places, or

events have shaped your clients’ attitudes

toward money? Understanding their

satisfaction with their financial past gives

you a backdrop to their financial story. Financial satisfaction

Satisfaction can be defined as a feeling

of fulfilment and contentment. It often

depends on your clients’ definition of

success. Therefore, evaluating your

clients’ level of satisfaction with their

financial life depends more on emotional

than material factors. Use a detailed

questionnaire to examine the level of

financial satisfaction in your clients’ life

and help determine what areas of their

financial life need immediate attention Life principles and values

Life principles and values include all of the

attitudes and beliefs that help individuals

navigate through life. Understanding

your clients’ underlying principles and

beliefs that relate to their life and attitude

towards money is critical to building a

financial plan that aligns with their belief

system and will help ensure they are

happy and engaged with the plan. Life stage and transitions

Life transitions are planned or unplanned

life events that involve the movement of

money. Once you better understand your

clients as individuals, you can focus on

the events in their lives that may have

financial implications Life goals

Work with clients to identify their

aspirations in greater detail, then prioritise

and plan for them accordingly. By

understanding how specific goals fit into

the larger picture of your clients’ lives,

you can work together to better align their

financial goals with their guiding principles

and beliefs. You can apply a goals priority

matrix like the one below to put those

goals in perspective and decide their

relative importance. Goals-based financial planning

The ultimate purpose of investment

planning is to achieve your clients’ life

goals, in other words, the end of the

means. Different clients will have different

financial goals, both as a whole and with

individual parts of their financial whole.

A true financial planner is in the goals

achievement business, not the investment

business. Throughout the process and life

history of your clients, every action you

take and plan you make should hinge on

helping your clients achieve their goals.

Likewise you should measure progress

against the clients’ goals, rather   THAN     

some unrelated performance target.  and transitions

Part 2: Gather financial information The second part of knowing your client

resembles a traditional fact find. It goes

beyond time horizons and risk profiles into

greater depth on a client’s current state,

behaviours, family situation goals and

progress to dat Current financial situation

Start with your clients’ total net worth in

the form of all static assets and liabilities,

e.g. personal balance sheet. As a separate

sub-section you will also need a detailed

breakdown of their current investment

portfolio. Finally, generate a cash flow

statement for them comparing all income

and expenses.

See the appendix, pp. 59-60, for

simplified examples of a personal balance

sheet and a personal cash flow statement.

Financial goals

In the first section, we looked closely at

clients’ life goals. With those in hand,

you can begin to drill down to specific

financial objectives and categorise them.

These include details on retiring, buying

a new home, or saving to send a child to UNIVERSITY

Progress to date

You can now make a preliminary

assessment of clients’ progress towards

their goals. Map the current state to the

articulated goals and identify any gaps.

How ready are they to retire? Run a

straightforward simulation of expected

retirement income. Compare their liquid

assets to their liquidity requirements and

see how they fare. This information will

form a key component of the plan you

eventually develop

You may need to assess the

reasonableness and achievability of their

goals and educate your clients to adjust

their goals or habits as needed. You will

need to prepare them to begin to adjust

their savings and spending habits or

restructure their investment portfolio.

2. Develop a plan

A clear, written plan is crucial to the success of a systematic

investment process. It will help you:

„. define a portfolio’s purpose.

„. measure its success at fulfilling your clients’ goals.

„. establish and strengthen your client relationships.

„. clearly articulate your client promise and deliver more consistent


„. protect your clients from the negative effects of emotional decision

making that can undermine investment portfolio effectiveness.

This section takes you through the process of evaluating the gathered

data and using it to write an effective investment plan. Part 1: Categorise and evaluate the data The following framework provides a useful way to categorise the different types of

information you gathered into categories that will help structure and inform your clients’


Focus on risk and return

The risk and return sections of the

framework deserve particular attention.

They define the after-tax return

requirement consistent with acceptable

risk tolerance and the clients’ financial

goals. However, clients don’t have just

one ‘risk profile’. They have different

risk/return requirements or profiles for

different goals. You will need to define the

return requirements to reach critical and

discretionary goals as they will differ both

in priority and time horizon.

An important but often overlooked aspect

of risk and return is defining these two

critical factors in ways that resonate with

clients. You can present the return side

of the equation in terms of expected

return, expected retirement income

and the historical probability of reaching

their goals. In the context of historical

asset class returns you should carefully

explain the risks to your clients in real

and meaningful ways, including volatility,

shortfall risk and maximum loss.

Part 1: Categorise and evaluate the data

Return Determine income, capital appreciation and total return required to meet client


Educate clients to set and achieve realistic expectations, including the importance

of saving more and the requirement to rationalise and prioritise goals.

Risk Determine clients’ ability(financial) and willingness(psychological) to take risk.

Understand how clients view risk, including risk of loss, risk of not meeting critical

financial goals, maximum threshold for portfolio volatility etc.

This is where a standard risk profile questionnaire comes into the process.

Time Determine the investment time horizon for each goal or goals. This may be a

single-phase goal such as retirement; or multi-stage goals such as an emergency

fund, first home, children’s education, accumulation for retirement, retirement draw

down. This may imply dividing the portfolio in to different pots, each with their own

horizon and risk/return profile.

Tax This includes the location(such as in a pension or tax wrapper) and the types

of investment assets and accounts. It includes a consideration of capital gains

thresholds and income tax band.

Liquidity Define the amount of assets or portion of portfolio that must be liquid at all times,

as agreed with the client and driven by things like short-term investment goals,

emergency fund requirements and risk tolerance.

Legal Determine any legal considerations. This includes an understanding of the relevant

regulatory requirements that govern the adviser-client relationship and the nature of

the services you provide

Unique Take into account any out-of-the-ordinary circumstances that apply. These include

divorce, terminal illness, job loss, dependants with special needs. ====================

Part 2: Develop an ‘Investor Policy Statement’ Institutional investors manage their

investments based on a written

agreement, sometimes called an Investor

Policy Statement(IPS). Successful advice

businesses have adopted this practice as

part of their investment advice process.

Each client’s IPS should reflect your firm’s

Statement of Investment Principles. The

IPS states explicitly how you are applying

your investment principles to the individual

client’s circumstances, investment

timeframe and goals.

Defining goals and measuring


The IPS defines the purpose, objectives,

and measures(Key Performance

Indicators) of success for your client’s

investment portfolio. It also summarises

the agreed investment strategy. Having

a written plan in place helps establish

productive communications and set

expectations with clients. This can be

especially useful when markets go

through inevitable periods of volatility as

it can help focus the clients’ attention on

long-term goals, rather than short-term

market noise.

Managing risk

Developing an IPS with your clients lays

a solid foundation for the relationship,

fostering trust, confidence and

understanding. It also helps to avoid

misunderstandings that can lead to legal

and regulatory risk. If you can show

that all your decisions adhered to the

tenets of an explicit and well-crafted IPS

informed by your Statement of Investment

Principles, be it to the regulator, or in a

worst-case scenario a court, it may be of

great help. Writing the IPS

Now you’re ready to convert all the

information you’ve gathered into an IPS

to agree with your client. Again, each

of these categories should flow from

your Statement of Investment Principles

as they map to clients’ individual

circumstances, investment timeframe and

goals. Account


Summary of investor and circumstances, personal preferences and constraints,

including any tax, legal, or regulatory issues.

Goals Clearly state the goals and time horizon of the portfolio. This should include any

benchmarks that apply to monitoring progress towards the goal(s).

Risk/return requirements

Define the return requirements and the agreed level of risk(based on their risk

profile balanced by return requirements) needed to achieve those requirements.

Include any ongoing income distribution needs from the investment portfolio, and

other liquidity concerns stemming from withdrawals from the portfolio.

Allowed investments

Define the permissible asset classes and investment types, including any

constraints or restrictions, e.g. ethical funds etc.

Asset allocation policy

Include allowable asset classes, sub-asset classes and target strategic asset

allocation, including all ranges and targets.

Diversification policy

Define the required diversification and tolerances for drift.

Rebalancing policy

State how often a portfolio will be rebalanced if following a time-based plan, or

what the trigger will be if you’re going to rebalance based on changes to the asset

allocation that results from market movements.

Monitoring Define responsibilities regarding how the portfolio and performance will be

monitored, reported and controlled.

Relationship Clearly defining the client-adviser relationship should probably also be documented in the governing document. 3. Portfolio construction

Taking a top-down approach to portfolio construction can help

redefine the client-adviser relationship and fits well within a post-RDR

framework of financial planning in a fee-based environment.

A top-down approach results in portfolios mapped specifically to

clients’ circumstances, attributes and financial goals. Take a top-down approach

When it comes to building a portfolio, some individual investors focus on selecting the

right fund manager or fund. However, manager selection forms only a small part of the

portfolio-construction process. A top-down approach calls for building client portfolios by

starting with asset allocation based on clients’ goals and risk tolerance for each goal, then

proceeding to populate the agreed asset allocation with manager selection as only the

final step Bottom-up approach

can result in haphazard

outcomes, as well as

misalignment with

client objectives and

risk profile 1 Asset allocation

Asset allocation – focus on risk and return

Several studies have shown that the most

important decision when constructing a

portfolio is asset allocation. This means

making sure the portfolio has the right mix

of assets to suit your client’s individual

circumstances, investment aims and

attitude to risk. This is where you can use

traditional tools such as model portfolios

to help determine the basic building

blocks of the portfolio. The risk-return

profile will determine this at very high

levels, but don’t overlook the importance

of diversification at asset allocation level.

Asset class performance over time

Depending on things like changes in the

overall economy and even investment

fashions, the best and worst performing

asset and sub-asset classes continually

change. For example, growth funds may

perform well compared with income

funds during economic booms and viceversa

when the economy is slower. The chart puts this into context, showing

how various equity sub-asset classes

performed between 1994(the first year

that separate data for growth and value

styles became available) and 2011. The

numbers show their ranking from best(1)

to worst(6) for each year since 1994.

This is why it’s so necessary to diversify

across different asset classes. Since

it’s difficult to forecast which sub-asset

class or classes will be next year’s

winners, it makes sense to hold a spread,

proportionate a client risk/return profile,

rather than trying to pick the next big


Adviser as ‘behavioural coach’

Using an asset allocation strategy helps

free your clients from the risk of following

dangerous investment fads. Even

professional investors get their timing

wrong, following the herd into a hot asset

or market that has reached its top and

may fall dramatically. In a sense you are

acting as your clients’ behavioural coach,

keeping them from making emotional

decisions and ensuring that their portfolio

stays balanced and in line with their riskreturn

profile. Please see our separate

adviser guide, Behavioural Finance for

more details on this topic. Sub-asset allocation – focus on diversification

Once you’ve decided an overall asset

allocation, you need to decide on subasset

allocation – that is, how you divide

the portfolio between the sub-assets,

or different kinds of asset within each

asset class. For example, a sub-asset

class within equities might include large

companies, smaller companies, growth

funds, income funds and global equities.

Just as when you combine the major

asset classes, diversification is essential

when choosing sub-assets. It helps to

ensure that you don’t add too much risk

by concentrating in a particular sub-asset

class. In some cases, you may decide

to adjust the proportions of sub-classes

held to increase a portfolio’s potential for

growth(while tolerating an extra degree

of risk).

In most cases, a portfolio’s sub-asset

class allocation should be diversified and

proportional to the market-cap weightings

of the broad market, unless you are

overweighting a market segment or sector

as part of a conscious strategy All-index portfolio For those who want:

„.Minimal return variability

relative to market or


„. Lowest expenses

„. Lowest manager risk

„.History of long-term

Outperformance mix

Active/passive mix For those who want:

„.Returns between an all-index

and all-active


„.Moderate variability to


„.Moderate potential for Alpha All-active portfolio For those who want:

„.Opportunity for alpha

„.Opportunity for style


„.But willing to accept:

–– Higher costs

–– Higher manager risk

–– Higher variability relative

to market Combining the two very different approaches to portfolio construction can add real value.

Broad-market index funds combine diversification with low costs, a strategy that has

historically and on average outperformed most actively managed funds. On the other

hand, because active managers veer from the market-cap weightings typical of most

indexes, they provide the opportunity of outperforming their benchmarks, as well as the

risk of lagging them.

Under the right circumstances, active and passive components can complement each

other by moderating the swings between the extremes of relative performance. Such a

combined strategy can help avoid the pangs of regret that your clients might otherwise

experience when one approach trumps the other.

The core-satellite model

In the core-satellite approach to portfolio

construction, a large part of the portfolio

(the core) is invested in index funds to

capture the market return. Then, carefully

selected active or specialist index

investments(the satellites) are added to

provide the potential for extra returns and


The chart shows how a portfolio could be

constructed combining the advantages of

both passive and actively managed funds.

Please note that the asset allocation

shown is for illustrative purposes only and

is not a recommendation. Asset allocation

should always be designed individually,

to suit each client’s individual situation,

needs and aims. Focus on tax

Investors, the media and advertising

typically focus on a fund’s pre-tax total

returns, overlooking the fact that this is

not what investors get after taxes. Others

might go to the other extreme and focus

solely on tax-efficiency, ignoring the

simple arithmetic that low taxes on a low

return may still produce a low return.

Asset location tackles the issue of

allocating assets among taxed and taxefficient

accounts(such as tax-efficient

pensions or ISAs) to maximise after-tax

returns. In any given year the extra return

one gets after taking taxes into account

might be small, but can make a dramatic

difference when compounded over time. Manager selection – focus

on costs

Whether you choose index or active

managers you increase your chance of

outperformance by focusing on those with

lower fund costs, because you get to keep

more of any return the funds achieve.

Costs, like interest, also have a

compounding effect over time. They can

have a dramatic impact on investment

returns, one that’s not always obvious

or transparent. The chart reveals the

true importance of costs by showing the

impact of Annual Management Charges

(AMC) over time.

We’ve assumed neutral growth so that

the compounding effect of costs is readily

apparent and not obscured by investment

returns(either positive or negative). Note

how a low-cost portfolio, such as 0.2%,

retains over 95% of the capital after 25

years, while a high-cost portfolio, say 2%,

has eroded by almost 40%. 4. Implement the plan

With a clearly articulated plan in place and a portfolio constructed,

the theory ends and the practice begins – it’s time to start investing.

Successful practices strive for consistency of client outcome driven by

their Statement of Investment Principles. The implementation balancing


Successful practices understand that all

implementation decisions must achieve an

optimum balance between cost efficiency

and ensuring the best possible client

outcome. Cheapest isn’t always best and

both your business interests(profitability,

risk management etc.) and client outcome

(best execution, selection etc.) have to be

achieved for an implementation process to

remain sustainable. Achieving this balance

entails consideration of three key topics:

„„Whether to outsource or DIY.

„„Managing risk, both for the client and

the business.

„„Systemising portfolio management

based on your Statement of Investment

Principles. Outsource or DIY?

First you need to decide whether

outsourcing or DIY is best for you and

your business. Remember, even when

you outsource, you’re still responsible for

everything that the outsource provider

does. Your provider becomes part of your

service offering and your clients will hold

you responsible for the outcomes. The

question of whether or not to outsource

rests squarely on whether or not your

outsource partners can deliver on your

service promise to your clients at an

advantageous cost, to the level of quality

your clients will expect.

Successful practices do tend to outsource

anything that is not part of their core

competence, such as specialist legal

advice for example. But if outsourcing is

not any better than you at something, why

do it? Managing risk

Managing risk boils down to having a

consistent client outcome, no matter

who the individual adviser is, rather than

relying solely on adviser flair, which can

lead to embedded risk.

Compliance and risk management – along

with implementing systems and controls

as part of your FSA responsibilities as a

controlled function – can seem difficult

and overwhelming, but it’s central to

remaining compliant and building trust

and ensuring the sustainability of your

business. Also, having a robust risk

management system in place can be a

powerful selling point for your clients.

They like knowing that their adviser is

working hard to protect them.

The first step is to identify each risk

point, both financial and reputational, and

put in place provable, demonstrable risk

mitigation steps. For example, dual sign

off of any asset purchases to make sure

they align with the client IPS. A related

activity is systemising the non-negotiable

items, e.g. test performance against the

risk parameters as laid out in the client

IPS. This isn’t negotiable and should be

automatic. Ensure that you’re not permanently

embedding a problem however. For

example, make sure you understand how

an asset allocation tool works and why it

generates a given outcome to ensure that

it’s not a flawed outcome.

Systematic portfolio


s concerning implementation

ultimately come down to decisions about

in-house IT systems and third-party

services, such as platforms. The first

thing to come to terms with is there’s no

holy grail – it all comes down to achieving

an appropriate balance between client

outcomes and costs.

Now that you have a plan that your

client agrees with, it’s time to consider

which systems or platforms you need

to implement it. Your client proposition

should drive your system/platform/wrap

decisions, not the other way around. System/platform choice

Deciding on systems and choosing platforms leads to a variety of questions you need

to answer. These questions all centre on ensuring that you only make promises you

can keep and that your systems will help you keep those promises. Any decisions must

include both client and business benefits to be sustainable.

System or systems First decide how many systems or platforms you need to implement

your client promise. Find the best mix that favours both your client and

your business. Remember that multiple platforms also equal multiple

costs. Each platform or system entails training and implementation costs

regardless of how much or little you use it and those costs are fixed.

Coverage To implement fully, you may need to have access to all the relevant funds

and wrappers. In a post-RDR world you may also need to demonstrate a

‘whole of market’ examination; can your mix of systems ensure that?

Costs Cutting system costs only in the interest of margins probably isn’t

sustainable. Costs have to be balanced against the relevant client

outcome. Remember, cheapest isn’t always best.

Risk controls / MI Does your system provide the relevant risk controls and management

information you need?

Client access Have you promised your client direct access to monitoring their

investments? If so, does your system(s) support that promise?

Servicing vs. sales Does the system balance the needs of servicing and sales? Making

the ‘sale’ is important, but keeping your client promise through robust

servicing ensures clients are willing to pay your fees for your service for

the long term. 5. Monitor progress

To ensure the plan stays on track it needs to be monitored and

regularly assessed. This includes periodic assessments at set intervals

according to a predefined set of criteria. Regular reviews consider

the progress against the clients’ goals and required rate of return and

adjust if necessary.

Monitoring and review also help to solidify the client-adviser

relationship by continually adding demonstrable ongoing value and

expertise for the client. The importance of review

It’s no accident that successful advisery

practices place a significant emphasis

on the review process. In the past, initial

client engagement was perhaps the most

significant event, as this established the

relationship and where commission was


Thereafter, ‘review’ meant a cursory

check on client holdings and a chance

to uncover further sales opportunities.

As the fee-for-service model has grown,

best-practice advisers have come to

understand that the client will only pay an

ongoing fee for a valuable service. Only

if clients feel they are making progress

towards their goals will they keep paying

their adviser. Indeed, demonstrating your

ongoing service for the fee you charge is

now a regulatory requirement.

The most successful advice practices

don’t just offer a portfolio review service,

they offer a ‘goal attainment’ service. As

a result, the ‘review’ has become more

than just a review of the investment

portfolio. It involves a fundamental

reappraisal of client goals and aspirations,

with adjustments to the financial plan if

necessary. Advisers can use the review

process to reassure clients that they

remain on track to meet their goals. What to review and how

You’re seeking to demonstrate to the client that your plan is getting them to where they

want to be emotionally. So this is where you check in with your clients to reaffirm their

portfolio objectives, situation and stated goals.

Significant life events If the client experienced a major life-changing event, such as a

divorce, death in the family, marriage or an addition to the family,

you might need to revisit the plan from step one. This presents a

fantastic opportunity to demonstrate your value to the client by

showing your flexibility and expertise at dealing with changing

circumstances and adjust their plan accordingly.

Asset allocation strategy If nothing has changed which would require an adjustment of the

plan, you review the asset allocation for portfolio ‘drift’, comparing

results to the objectives and assessing the likelihood of achieving

them. All tolerances for asset allocation and the resulting actions

should be set out in the IPS so that you know what to do to address

any gaps or imbalances. As part of this process, review each of the

major asset classes and their performance. Consider whether other

asset class or sub-asset classes merit consideration, within the

parameters of the IPS, which could better help the client meet their

long-term objectives.

Real vs. actual risk You will also need to assess the risk that the portfolio actually

produced, in terms of volatility or other risk metrics, and determine

if the actual risk matched the predicted risk and if the actual risk

was consistent with the client’s risk tolerance.

Costs Review the costs of the portfolio and ensure they stay within the

parameters agreed in the IPS. Again, this is another way to overtly

demonstrate your value to the client by demonstrably working

on their behalf to ensure the most efficient investment portfolio


Fund manager At the fund manager level, evaluate each individual fund manager

against the criteria set out in the IPS for the goal of each fund. Does

the fund fulfil the advertised risk and diversification function you’ve

assigned to it? Has the fund manager changed? Have charges

changed? This simplified IPS is for illustrative

purposes only.

Client / circumstances

Mr. Joe and Mrs. Jane Blogs(Married)

DOB: Joe: 1973, Jane 1972.

Children: 2, both at university

Service relationship

Wealth Management: Gold(see separate

documentation defining level of service)

Financial Goal(s)

„„Financial independence and retirement

at age 66.

„„Legacy: Leave debt-free properties to

each of their two children.

„„At retirement: 12-month global tour

(Europe, Asia, Africa).

Probability of success: 96%, based on

their regular savings and modest lifestyle.

Purpose of Portfolio

„„Provide steady growth of capital until


„„An inflation-adjusted, after-tax income

of £XXX every year in retirement.

„„A lump sum of £ XXX upon retirement

Risk and Return Expectations

Based on the fact find, we agree that

the clients’ acceptable risk rating is 5

on a scale of 7(the clients would be

uncomfortable with a 20% drop in portfolio

value). We expect pre-tax, inflationadjusted

returns of X% from cash, X% from

bonds and X% from stocks. We expect a

dividend yield of X% from stocks that will

at least keep up with inflation.

Time Horizon

Target retirement date is XX/20XX.

Target Asset Allocation

„„Cash X%

„„Bonds X%(break down by sub-asset

class, such as: Corporate, government,

inflation linked)

„„Property/REITs X%

„„Equities X%(Break down by subasset

class, by geography and market


Diversification policy

No one fund or account should comprise

more than X% of a given asset class,

except cash, with X% threshold for


Rebalancing and review

„„We will provide a detailed annual report

for the client review.

„„The portfolio will be reviewed annually

on 1 August and rebalanced accordingly,

selling what has gone up and buying

what has gone down if necessary

„„New money will be used ongoing to

help maintain target asset allocation to

help avoid rebalancing transaction costs

„„A review of progress and client

circumstances will be undertaken at

our offices on the third Monday in July

annually. Any changes made to the plan

will then be subsequently reflected in

the rebalancing on 1 August.

Investment philosophy

(Your statement of investment principles)

Investment Universe

„„The portfolio will be based on a coresatellite

model, with the majority in lowcost

index tracking funds and/or ETFs.

„„Satellite funds will be geographic or

sub-asset class specific index funds,

or carefully selected active funds for

purposes of diversification and risk

management(refer to investment

philosophy for selection criteria).

„„No individual stock or derivative

positions will be allowed.


Posts: 47
Joined: Tue Jan 14, 2014 4:42 am

Investment, Security And Portfolio Management

Postby Dickon » Mon Dec 12, 2016 9:51 am

Dear Sir,

Please help me to solve these questions.

1.   Assume that you are a dealer of NSE and BSE. If an investor or group of investors approaches you for a valuable advice of investing several lakhs through your dealership network what will be your advice? Explain the strategies.

2.   How would you characterize the behaviour of the stock during the period [e.g., aggressive, neutral, defense, etc.] relative to the market? State why, in terms of : a. Underlying statistical relationships, and b. Company basics [e.g. products, services, operations and financing]

3.   Imagine that the stock market has been declining. A technician is looking for signs of an upturn in the market. What sorts of readings should he be expecting from

a.   Breadth of the market

b.   Volume of trading c.   Odd-lot trading d.   Short - selling

4.   You are attempting to construct an optimum portfolio. Over your holding period, you have forecasted an expected return on the market of 13.5 percent with a market variance of 25 percent. The Treasury security rate available is 7 percent [risk-free]. The following securities are under review:


Boeing      3.72      0.99      9.35          

Bristol-Myers   0.60      1.27      5.92          

Browning-Ferris   0.41      0.96      9.79          

Emerson Electric   -0.22      1.21      5.36          

Mountain States Telephone   0.45      0.75      4.52

With warm regards


Posts: 37
Joined: Sat Jan 11, 2014 7:49 pm

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