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The Process of Portfolio Management Chapter 26 Determinants of Portfolio Policies Objectives Constraints Policies Return Requirements Liquidity Asset Allocation Risk Tolerance Horizon Diversification Regulations Risk Positioning Taxes Tax Positioning Unique Needs Income Generation 26-2 1-2 Matrix of Objectives Type of Investor Return Requirement Risk Tolerance Individual and Personal Trusts Life Cycle Life Cycle Mutual Funds Variable Variable Pension Funds Assumed actuarial rate Depends on payouts Endowment Funds Determined by income needs and asset growth to maintain real value Generally conservative 26-3 1-3 Matrix of Objectives (cont’d) Type of Investor Return Requirement Risk Tolerance Life Insurance Spread over cost of funds and actuarial rates Conservative Nonlife Ins. Co. No minimum Conservative Banks Interest Spread Variable 26-4 1-4 Constraints on Investment Policies Liquidity Ease (speed) with which an asset can be sold and created into cash Investment horizon - planned liquidation date of the investment Regulations Prudent man law Tax considerations Unique needs 26-5 1-5 Managing Portfolios of Individual Investors Overriding consideration is life cycle Needs for current income Appropriate level of risk Appropriate level and type of life insurance Taxes and tax planning 26-6 1-6 Tax Sheltering for Individual Investors Tax-deferral option - controlling the timing of gains on investments. Tax-deferred retirement plans IRAs Keogh plans Deferred annuities Fixed Variable 26-7 1-7 Pension Funds Basic types of plans Defined contribution plans Defined benefit plans Pension investment strategies Defined contribution versus defined benefit Contingent immunization Investing in equities 26-8 1-8 Future Trends in Portfolio Management Increased use of inflation-indexed bonds. More direct management of funds by individuals. More companies offering structured financial products. 26-9 1-9