Investment Policy & Planning Flashcards

Which IPS element defines the yardstick used to evaluate the manager's investment results?

Answer: The benchmark

The benchmark specified in the IPS is the standard against which portfolio performance is measured.

A client's willingness to take risk is high, but their ability to take risk is low. How should the adviser usually set the overall risk tolerance in the IPS?

Answer: Use the lower ability-based assessment

When ability and willingness conflict, the more conservative assessment usually prevails, and ability constrains willingness.

A retiree needs $80,000 a year from a $2,000,000 portfolio and expects 3% inflation. Using the multiplicative method, what is the required nominal return?

Answer: 7.12%

(1.04 × 1.03) − 1 = 7.12%, where 4% is the real spending rate.

Which item belongs in the 'unique circumstances' section of an IPS?

Answer: A restriction against selling inherited shares of a family company

Unique circumstances cover client-specific restrictions, such as legacy holdings or ethical screens, that the other constraint categories don't address.

A 45-year-old plans to retire at 65 and expects to live to about 90. How is this time horizon best described?

Answer: Long-term, multistage

A change in circumstances such as retirement creates separate stages within a long overall horizon.

Strategic asset allocation is best described as:

Answer: Long-term target asset class weights that reflect the IPS objectives and constraints

SAA turns the IPS into long-run policy weights for each asset class.

Holding everything else constant, higher transaction costs for an asset class should lead to what kind of rebalancing corridor?

Answer: A wider corridor

Higher trading costs justify wider tolerance bands, so the portfolio is rebalanced less often.