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GD31403 Introduction

• Portfolio: The grouping of assets.

• Asset Allocation: It is the process of deciding how
Week 1 to distribute an investor’s wealth among different
countries and asset classes for investment purposes.
• Asset Class: It refers to the group of securities that
have similar characteristics, attributes, and
Portfolio Management risk/return relationships.
Environment • Portfolio Management: The construction of
portfolio that meets the investor’s needs at the
minimum risk levels.


Introduction The Basic Financial Needs

• Investor: Depending on the type of investors, Life Insurance: Providing death benefits and,
investment objectives and constraints 限制 vary possibly, additional cash values
• Term life and whole life insurance
变化 • Universal and variable life insurance
– Individual investors Non-life Insurance
– Institutional investors 机构投资者 • Health insurance & Disability insurance
• Automobile insurance & Home/rental insurance
• The asset allocation decision is a component of a
Cash Reserve
structured 4-step portfolio management process.
• To meet emergency needs
• However, only start thinking about investment
• Equal to six months living expenses
when the basic insurance and cash reserve needs
are met.

universal life insurance, the premium is flexible

An institutional investor is an entity which pools money to
purchase securities, real property, and
other investment assets or originate loans. Institutional
term life: death
investorsinclude banks, insurance companies, pensions,
hedge funds, REITs, investmentadvisors, endowments, and
mutual funds.

Individual Investor Life Cycle The Portfolio Management Process

• Policy Statement
– Specifies investment goals and acceptable risk levels
– Should be reviewed periodically
– Guides all investment decisions
• Study Current Financial and Economic Conditions
巩固 and Forecast Future Trends
– Determine strategies to meet goals
– Requires monitoring and updating


The Portfolio Management Process The Portfolio Management Process
Exhibit 2.3
• Construct the Portfolio 1. Policy Statement
Focus: Investor’s short-term and long-term needs,
– Allocate available funds to minimize investor’s risks and familiarity with capital market history, and expectations
meet investment goals
2. Examine current and project financial, economic, political,
• Monitor and Update and social conditions
Focus: Short-term and intermediate-term expected
– Evaluate portfolio performance conditions to use in constructing a specific portfolio

– Monitor investor’s needs and market conditions

3. Implement the plan by constructing the portfolio
– Revise policy statement as needed Focus: Meet the investor’s needs at the minimum risk
– Modify investment strategy accordingly
4. Feedback loop 反馈回路: Monitor and update
investor needs, environmental conditions, portfolio


Why the Need for a Policy Statement Why the Need for a Policy Statement?
• Sets standards for evaluating portfolio
• Understand investor’s needs and articulate performance
realistic investment objectives and constraints – The statement provides a comparison standard in
– What are the real risks of an adverse financial judging the performance of the portfolio manager.
outcome, and what emotional reactions will I have? – A benchmark portfolio or comparison standard is used to
– How knowledgeable am I about investments and reflect the risk an return objectives specified in the
the financial markets? policy statement.
– What other capital or income sources do I have? – It should act as a starting point for periodic portfolio
How important is this particular portfolio to my review and client communication with the manager.
overall financial position?
– What, if any, legal restrictions affect me?
– How would any unanticipated portfolio value
change might affect my investment policy?

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Why the Need for a Policy Statement? Constructing the Policy Statement
• Other Benefits • Constructing the policy statement begins with a
– It helps reduces the possibility of inappropriate or profile analysis of the investor ’s current and
unethical behavior on the part of the portfolio future financial situations and a discussion of
manager. investment objectives and constraints.
– A clearly written policy statement will help create • Objectives
seamless transition from one money manager to
another without costly delays. – Risk
– It also provides the framework to help resolve any – Return
potential disagreements between the client and the • Constraints
manager. – Liquidity, time horizon, tax factors, legal and regulatory
constraints, and unique needs and preferences

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Investment Policy Statement - Example Investment Policy Statement – Example
(continue I)


Investment Policy Statement – Example

Investment Objectives
(continue II)
• Risk Objectives
– Risk objective should be based on investor’s ability to
take risk and willingness to take risk.
– Risk tolerance depends on an investor’s current net
worth and income expectations and age.
• More net worth allows more risk taking
• Younger people can take more risk
– A careful analysis of the client’s risk tolerance should
precede any discussion of return objectives.
– (Exercise: To analyze investor’s profile risk, try Exhibit
2.4 in textbook pp.40)

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Investment Objectives The Importance of Asset Allocation

• Return Objectives • An investment strategy is based on four decisions
– The return objective may be stated in terms of an – What asset classes to consider for investment
absolute or a relative percentage return. – What policy weights to assign to each eligible class
– Capital Preservation: Minimize risk of real losses – What allocation ranges are allowed based on policy
– Capital Appreciation: Growth of the portfolio in real weights
terms to meet future need – What specific securities to purchase for the portfolio
– Current Income: Focus is in generating income rather
• According to research studies, most (85% to 95%)
than capital gains
of the overall investment return is due to the first
– Total Return: Increase portfolio value by capital gains
two decisions, not the selection of individual
and by reinvesting current income with moderate risk
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Asset Allocation Summary Asset Allocation Summary
• Policy statement determines the types of assets • Asset Allocation and Cultural Differences
to include in portfolio – Social, political, and tax environments influence the
• Asset allocation determines portfolio return more asset allocation decision
than stock selection – Equity allocations of U.S. pension funds average 58%
• Over long time periods, sizable allocation to – In the United Kingdom, equities make up 78% of assets
equity will improve results – In Germany, equity allocation averages 8%
– In Japan, equities are 37% of assets
• Risk of a strategy depends on the investor’s goals
and time horizon

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Real Estate
Investment Choices
• Fixed-Income Investments • Real Estate Investment Trusts (REITs)
– Bonds and preferred stocks – Investment fund that invests in a variety of real estate
properties, similar to a stock or bond mutual fund
• Equity Investments – Construction and development trusts provide builders
• Special Equity Instruments with construction financing
– Warrants and options – Mortgage trusts provide long-term financing for
• Futures Contracts
– Equity trusts own various income-producing properties
• Investment Companies/ Mutual Fund

*Note: Most of these asset classes have been covered in

GD31503, This lecture will only discuss real assets and low
liquidity investments

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Real Estate Real Estate

• Direct Real Estate Investment
• Rental Property
– Purchase of a home
– Acquire apartment buildings or houses with low down
– Purchase of raw land
• Intention of selling in future for a profit
– Derive enough income from the rents to pay the
• Ownership provides a negative cash flow due to
expenses of the structure, including the mortgage
mortgage payments, taxes, and property
maintenance payments, and generate a good return

– Land Development – Rental property provides a cash flow and an opportunity

to profit from the sale of the property
• Divide the land into individual lots
• Build houses or a shopping mall on it
• Requires capital, time, and expertise
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Low-Liquidity Investments Low-Liquidity Investments
• Basic Concepts • Antiques 古董
– Some investments don’t trade on securities markets
– Dealers buy at estate sales, refurbish, and sell at a
– Lack of liquidity keeps many investors away profit
– Auction sales 拍卖销售 create wide fluctuations in – Serious collectors may enjoy good returns
prices – Individuals buying a few pieces to decorate a home
– Without notional markets 名义市场 , dealers incur may have difficulty overcoming transaction costs to
ever enjoy a profit them more as hobbies than
招致 high transaction costs investments
– Some may consider them more as hobbies than



Low-Liquidity Investments Low-Liquidity Investments

• Art • Coins, Banknotes and Stamps

– Investment requires substantial knowledge of art and – Enjoyed by many as hobby and as an investment
the art world – Market is more fragmented 支离破碎 than stock
– Acquisition of work from a well-known artist requires
market, but more liquid than art and antiques
large capital commitments and patience
– High transaction costs
– Price lists are published weekly and monthly
– Uncertainty and illiquidity – Grading specifications aid sales
– Wide spread between bid and ask prices



Low-Liquidity Investments Low-Liquidity Investments

• Coins - Example • Banknotes - Example

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Low-Liquidity Investments Low-Liquidity Investments
• Stamps - Example • Diamonds
– Can be illiquid
– Grading determines value, but is subjective
– Investment-grade gems require substantial
– No positive cash flow until sold

– Costs of insurance, storage, and appraisal 评价

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