Investments, 8th editionBodie, Kane and MarcusSlides by Susan HineSlides by Susan HineMcGraw-Hill/IrwinCopyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.CHAPTER 28Investment Policy and the Framework of the CFA Institute28-2Objectives Portfolio objectives center on the risk-return trade-off between investors expected return and how much risk they are willing to assume Return requirements Risk tolerance28-3Figure 28.1 CFA Institute Investment Management Process28-4Table 28.1 Components of the Investment Management Process28-5Table 28.2 Components of the Investment Policy Statement28-6Table 28.3 Determination of Portfolio Policies28-7Individual Investors The basic factors affecting individual investor return requirements and risk tolerance: Life-cycle state Individual preferences28-8Table 28.4 Matrix of Objectives28-9Other Investors Personal Trusts Mutual Funds Pension Funds Endowment Funds Life Insurance Companies Non-Life Insurance Companies Banks28-10 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 needsConstraints on Investment Policies28-11Table 28.5 Matrix of Constraints28-12Asset Allocation Steps: Specify asset classes to be included in the portfolio Specify capital market expectations Derive the efficient portfolio frontier Find the optimal asset mix28-13Policy and Taxes Policy Statement Institutions may be governed by boards Issue official statements of investment policy Taxes and Asset Allocation May need to choose assets based on tax implications28-14Managing Portfolios of Individual Investors Human Capital and Insurance Investment in Residence Saving for Retirement and the Assumption of Risk Retirement Planning Models Manage your own Portfolio or Rely on Others28-15Tax 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 Variable and universal life insurance28-16Pension Funds Defined contribution plans Investment policy is essentially the same as for a tax-qualified individual retirement account Defined benefit plans Contractual arrangement setting out the rights and obligations of all parties28-17Pension Funds Continued Pension investment strategies Defined contribution versus defined benefit Contingent immunization Investing in equities28-18Investments for the Long Run Advice from the mutual fund industry Investment horizon determines which risk- free rate to choose Make simple investment choices such as TDRFs (target date retirement funds) Inflation risk and long-term investors