Javier Cuadra

Investments
Jacob Tenney

CHAPTER 18 DISCUSSION QUESTIONS (1,5,7-9)

1. Describe the portfolio management process and identify the three stages critical for
success.

The portfolio management process is an organized collection of measures that are continuously
applied in order to build and maintain an effective portfolio of assets to achieve the defined
objectives of a client.

Stage One: The preparation stage. The first step in the process of fund management is to
consider the needs of the investor and to create an investment policy statement (IPS). The IPS
describes the kinds of risks that the investor is able to bear, along with the investment goals
and restrictions. It will concentrate on short- and long-term needs of the borrower, experience
with the context of the stock market, and aspirations and constraints of the investors. The user
will need to review, edit and adjust the policy statement annually.

Stage two: Step one of implementation. The second stage is to create the portfolio. The
portfolio manager and the client must decide how available funds will be distributed across
various countries, asset groups and securities. This includes creating a portfolio that will
mitigate the danger to the investor while fulfilling the needs set out in the policy statement.

Stage three: Input Stage. The process of handling a portfolio of assets never stops. When the
funds are fully spent according to schedule, the hard work starts, tracking and reviewing
portfolio status and the needs of the client. The final step is constant monitoring of the needs of
the investor, stock market conditions and updating the policy statement as appropriate. One
part of the monitoring process is an evaluation of the success of a portfolio and a review of the
relative outcomes with the goals and criteria set out in the policy statement. We might need
some rebalancing.

5. Explain the importance of the investment policy statement to investors.

The aim of an investment policy statement is to explain the mechanism to be used in making
investment decisions by the financial planner or other fiduciary. As part of successfully
supervising, tracking and assessing the client's investment priorities, the financial planner must
obey the IPS words.
7. Explain the manner in which a return objective is computed for individual investors and the
importance of inflation as one of its components.

Most buyers are trying to increase their purchasing power in the long term. Inflation places this
target at risk as the returns on investment must first keep pace with the inflation rate in order
to boost actual buying power. The rising inflation erodes the principal's interest on fixed income
securities in about the same way. Inflation also asks investors just how much of a return (in
percentage terms) they intend to make on their savings to maintain their living standards.

By an example, the best way to explain inflation is. Suppose you can buy a burger this year for
$2 and the average rate of inflation is 10%. In principle, 10 percent inflation means the same
burger would cost 10 cents more, or $2.20, next year. And if you don't increase your wages by
at least the same amount of inflation, you won't be able to afford as many burgers. However, a
one-time price-level jump triggered by a fall in energy rates or the launch of a new sales tax is
not genuine inflation until it induces wages and other expenses to escalate into a cascade in
wage-prices. Likewise, an increase in the price of only one commodity is not inflation in itself
but could merely be a marginal demand adjustment indicating a fall in production for that good.
Ultimately, inflation is about money production, which is a result of too much money chasing
too little goods.

8. Explain the manner in which the risk objective is determined for an individual investor and
differentiate between an investor’s ability to take risk and the willingness to take risk.

Consider of flexibility as a mathematical measure of how much an individual can expect to risk
according to their objectives. In other words, skill is about how much money you have in
addition to your desires for investment. The lower the risk of lowering living conditions the
higher lowering risk-taking performance. That is usually associated with being wealthier — the
more money you have, or the larger your existing salary, the greater the willingness to take on
more risk. The other major area here is the horizon of time. The longer the time period the
more chance you can face and the more time you need to overcome any defeats in the near
term. Willingness is in the risk-taking mentality. It is a more analytical measure of the emotional
mindset of an investor toward investment. This is where our templates for classifying investors
come in handy. In my opinion, If there is a conflict between an investor's ability to take risk and
their willingness to take risk always go for the most conservative option.
9. Identify the appropriate course of action when an investor has risk and return objectives
that don’t match.

"Don't put all your eggs in one basket"

Is incredibly relevant to the investment realm. The diversification strategy, which spreads the
capital across many different securities and stock groups, is primarily used to help control a
portfolio's market risk. Mutual funds can be perfect places to diversify as they invest in several
different stocks. Selecting more than one mutual fund will help mitigate risk for your portfolio.
Consider also the possible advantages of picking portfolios from more than one asset class:
Shares may not be impacted as significantly when stocks are especially hard hit due to changing
circumstances.