Portfolio Management Styles/Techniques

What is the Investment Policy Statement used for?

- states the allocation of portfolio assets among different asset classes (i.e., growth equities, value equities, money market investments, long term debt, etc.). This is the setting of the basic portfolio strategy - strategic asset management. - •Once selected, the relative percentages assigned to each asset class can be shifted to time the market - this is tactical asset management.

Choosing specific stock investments is what style?

Active

Portfolio Management "styles" are either.... (2 things)

Active or Passive

Picking index funds for investment vehicles is what style?

Passive

All of the following statements concerning dollar cost averaging (DCA) are correct EXCEPT: A. DCA reduces the cost of purchasing shares below current market price B. the investor using DCA makes no attempt to adjust the amounts of investment by market trends C. an investor using DCA makes fixed dollar investments at regular intervals D. an investor using DCA will buy fewer shares when the price of shares is high

The best answer is A. Dollar-cost averaging is a way to reduce the investor's average cost of shares below the average price per share over the same period. The average cost will not be below the market price, and may actually be above the current market price in a steadily decreasing market. DCA requires an investor to make fixed dollar investments at regular intervals without regard to market trends. The result will be that the investor will buy more shares when the price falls and fewer shares when the price for shares is high.

A portfolio manager who believes that an extremely large short interest in NYSE listed issues is bullish would be called a: A. fundamentalist B. contrarian C. market timer D. technician

The best answer is B. A "contrarian" is an analyst that goes against the conventional wisdom. A contrarian believes that when prices are moving up quickly, it's time to sell; and that when prices are moving down rapidly, it's time to buy. The "idea" is that these signal either an "overbought" market that is ripe for a decline, or an "oversold" market where prices have dropped too far and are ready for a rebound. A very large short interest (that is, lots of investors have sold that stock short) indicates an "oversold" market, hence prices have been pushed too low and it is time to buy.

What are examples of money market funds?

Treasury Bills, Bank Certificates of Deposit, Commercial Paper and Repurchase Agreements.

What are Money market funds?

an asset class that invests in short-term maturities of 1 year or less

What is the Pension Benefit Guaranty Corporation (PBGC) used for?

provides insurance for defined benefit plans formed under ERISA that are terminated (typically due to the closing of a company) that have an unfunded pension liability *not used for defined contribution plans * only covers corporate plans, not government plans

What is Strategic Asset Allocation?

setting of the strategy for an asset allocation scheme - that is setting the percentage of asset to be allocated to each asset class and investment vehicles within that asset class, based on the customer's, age, investment objectives, financial situation and needs, investment time horizon, risk tolerance, etc.

What is a defined benefit plan?

•A defined benefit retirement plan is a corporate sponsored plan that promises a "defined benefit" amount to each plan participant. •The "defined benefit" amount is based upon the employee's earnings just before retirement. •Such plans generally require full vesting of benefits after 5 years of employment. •These plans benefit older employees with fewer years to retirement; since the benefit amount does not increase based upon years of service - it is based upon income prior to retirement. •The amount to be contributed into the plan for each employee is computed by an actuary - though there is some leeway in the way that the actuary computes the amount to be contributed. •The contribution must be made, whether or not the corporation is profitable. •These are tax qualified plans subject to ERISA requirements.

What is a defined contribution plan?

•A defined contribution plan specifies a fixed percentage of income (up to maximum permitted amounts) that is contributed annually by either the employer or the employee. •The annual contribution amount is fixed (either in dollar or percentage terms); and the longer the employee remains in the plan, the greater the contribution amount and hence, the greater the pension benefit for that person. •The contribution must be made, whether or not the corporation is profitable. •These are tax qualified plans subject to ERISA requirements.

What is a money purchase plan?

•Money purchase plans are qualified plans under ERISA that are really a variation of a defined contribution plan. •The employer must make an annual tax-deductible contribution based on a percentage of the employee's income. •The maximum annual employer contribution is 25% of income, up to $55,000 in 2018. •The contribution made by the employer can be subject to minimum vesting requirements set in the plan. •There are no matching employee contributions to this type of plan.

What is Tactical Asset Allocation?

•Tactical asset management is the permitted variation that the manager is allowed from the fixed percentage allocations strategically assigned to each asset class. If a certain sector is undervalued, the manager can tactically overweight this asset class by the permitted variation; if a certain sector is overvalued, the manager can underweight this asset class by the permitted variation.

Under ERISA, what are suitable transactions for pension plans?

•Under ERISA, pension funds must invest prudently, since they are funding future retirement benefits. •Pension funds invest in U.S. Government bonds, agencies, and "blue chip" corporate bonds and stocks. •Pension funds may also sell covered calls to enhance income. •Pension funds are not subject to tax, so investments in tax free municipal bonds that provide lower yields due to their tax exemption are not appropriate.

What are the 5 types of "asset classes"

◦Cash/Money Market Instruments ◦Fixed Income Securities ◦Equities ◦Real Estate ◦Commodities

What are prohibited transactions under ERISA?

◦Sale, exchange or lease of property between the plan and a "party-in-interest;" ◦Loan between the plan and a "party-in-interest;" ◦Furnishing of goods, services or facilities between the plan and a "party-in-interest;" ◦Transfer of plan assets to a "party-in-interest" or use of plan assets by a "party-in-interest." plan buying real estate owned by the company; and the plan buying securities issued by the company (with some limited exemptions).