CFA 3:Private Wealth 1

  1. What are the four investor personality types?
    Cautious, Methodical, Individualistic and Spontaneous
  2. What are the characteristics of a Cautious investor?
    • 1. Risk Averse and Emotional decisions
    • 2. Focus on preservation of wealth
    • 3. Low portfolio turnover, volatility and standard deviation
  3. What are the characteristics of a Methodical investor?
    • 1. More risk tolerant than cautious, but still risk averse
    • 2. Not emotional
    • 3. Diligently gather the best info possible
    • 4. Continually seek better info to confirm past investments
  4. What are the characteristics of a Individualistic investor?
    • 1. More risk tolerant than methodical
    • 2. Not emotional
    • 3. Do their own research
    • 4. Very confident in ability
    • 5. Do not seek re-affirmation of investment decisions (unlike methodicals)
  5. What are the characteristics of a Spontaneous investor?
    • 1. Most risk tolerant; very emotional
    • 2. High Port turnover
    • 3. Doubt investment advice
  6. What are the benefits of the IPS to the client?
    • 1. Identifies objectives and constraints (represents LT best interest of investor).
    • 2. Process is dynamic and can incorporate changed circumstances
    • 3. IPS allows continuity - Easily portable to a new PM
  7. What are the benefits of the IPS to the advisor?
    • 1. Can be used for calrifications if questions arise
    • 2. Good source of knowledge about the client
    • 3. Good for dispute resolution - including legal
  8. What are the steps in creating an IPS?
    • 1. Determing constraints
    • 2. Identify investor risk and return objectives
    • 3. Determine appropriate investment strategy per capital market expectations
    • 4. Determine Asset Allocation for meeting objectives within constraints
    • 5. Execute
    • 6. Evaluate performance
    • 7. Make changes as necessary
  9. What are the IPS objectives?
    • 1. Determine required return
    • 2. Determin risk tolerance
  10. What are the constraints in the IPS?
    • 1. Time Horizon
    • 2. Tax concerns
    • 3. Liquidity needs
    • 4, Legal and regulatory requirements
    • 5. Unique Circumstances
  11. What are the differenced between required and desired objectives?
    • Required are musts (i.e. living expenses, kids' college etc)
    • Desires are would like to, but haven't committed to yet (large bequests, early retirement etc.) It's not so much the item as the intention (Example: A vacation home could be required or desired depending on the intentions/commitment).
  12. What are the two components to Risk Tolerance for the IPS?
    Ability and Willingness
  13. Describe the ability to take risk in relation to the IPS.
    The Abiltiy to take risk depends on goals and time horizon and the volatility the portfolio can bear while still maintaining the goals. 3 categories (Above average, average and below average) Standard deviation, shortfall risk, size of port. Quantitative in nature.
  14. Describe the willingness to take risk in relation to the IPS.
    Psychological/Subjective in nature. Have they had bad experiences in the past? What level of decline makes them uncomfortable?
  15. Discuss the raltionship between the following factors and the ability to take risk:
    1. Port size
    2. Liquidity
    3. Time Horizon
    4. Imporance of spending
    5. Flexibility
    • 1. As Port size increases, ability to take risk increases
    • 2. As Liquidity increases, ability to take risk increases
    • 3. As Time Horizon increases, ability to take risk increases
    • 4. As Imporance of spending increases, ability to take risk decreases
    • 5. As Flexibility in creases, , ability to take risk increases
  16. What are the best ways to judge willingness to take risk?
    Actions speak louder than words and tolerance is a relative concept. If there are discrepancies, recommend education and point them out. Always go with the more conservative level of risk (ability vs. willingness)
  17. Dicuss the time horizons constraint of the IPS
    For an individual, this usually refers to their life time. Any event that causes reallocating in the portfolio delineates a stage in the time horizon (retirement vs. working).
  18. Discuss the tax constraint in regard to the IPS.
    Pre vs. Post tax required return. Always try to defer, reduce or avoid taxes. If future tax treatments are uncertain, recommend legal counsel. Consider Income tax, cap gains tax, transfer tax and wealth tax or personal property tax (like excise taxes).
  19. Discuss liquidity needs with regard to the IPS.
    Liquidity needs are outflows that need to be met by the portfolio. Types: Normal expenses, major planned expenses and emergency needs. Also, are their liquidity constraints in the portfolio? (assets that aren't liquid, are volatile or have high transaction costs to liquidate) Generally hold only enough cash to cover emergencies.
  20. What are the legal and regulatory constraints in regard to the IPS?
    Someone is on the board of directors and may have insider information. Trusts - recommend legal counsel for setting up personal trusts or family foundations. Make sure you balance the needs of income beneficiaries and remaindermen.
  21. What are the unique circumstances in the IPS constraints?
    • Socially responsible investing
    • Special instructions - slowly liquidate a position
    • Large holdings of a stock (bear sterns)
    • Constraints on types of investments (derivatives, short sales etc.)
    • Planned gifts
    • Assets held outside of investible portfolio (residences etc.)
    • Desired objectives not attainable due to constraints
  22. Whar are the two retirement planning models?
    • Deterministic
    • Monte Carlo
  23. What are the advantages of using Monte Carlo as opposed to the deterministic approach?
    • Probabilistic forecasts give the client and the manager a better indication of the risk return tradeoff of differen allocations
    • MC shows graphically the adverse impacts of short term volatility on the value paths
    • MC is better at incorporating tax effects
    • MC incorporates compounding effects
    • MC is flexible and can incorporate trading costs, taxes, reinvestments of dividends and interest and cash flows.
Card Set
CFA 3:Private Wealth 1
CFA 3:Private Wealth 1