PORTFOLIO MANAGEMENT

I. Understanding the Client and Risk Profiling

II. Economic Indicators that affect
Investments
III. Portfolio Construction and Evaluation
WHY IS IT IMPORTANT TO
KNOW YOUR CLIENT?
 KNOW YOUR CLIENT
The Know Your Client (KYC) rule is an ethical requirement for those in the
securities industry who are dealing with customers during the opening and
maintaining of accounts. There are two rules which were implemented in July
2012 that cover this topic together: Financial Industry Regulatory Authority
(FINRA) Rule 2090 (Know Your Customer) and FINRA Rule 2111 (Suitability).
These rules are in place to protect both the broker-dealer and the customer
and so that brokers and firms deal fairly with clients.

The Know Your Customer Rule 2090 essentially states that every broker-dealer
should use reasonable effort when opening and maintaining client accounts. It
is a requirement to know and keep records on the essential facts of each
customer as well as identify each person who has authority to act on the
customers behalf.
Read more: Know Your Client (KYC) http://www.investopedia.com/terms/k/knowyourclient.asp#ixzz4lgffecIz
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 KNOW YOUR CLIENT
ESTABLISHING A CUSTOMER PROFILE
- Age
- Existing Investments
- Tax Status
- Financial Needs
- Investment Experience
- Investment Time Horizon
- Liquidity Needs
- Risk Tolerance
 RISK PROFILING
RISK the uncertainty of future outcomes
RISK TOLERANCE the degree of variability in
investments returns that an investor is willing to
withstand
 RISK PROFILING
RISK TOLERANCE:
1. RISK AVERSE/CONSERVATIVE
2. RISK NEUTRAL/MODERATE
3. RISK TAKER/AGGRESSIVE
 SAMPLE INVESTOR PROFILE
QUESTIONNAIRE
TIME HORIZON
1. I plan to begin withdrawing money from my
investments in:
a. Less than 3 years 1
b. 3-5 years 3
c. 6-10 years 7
d. 11 years or more 10
 SAMPLE INVESTOR PROFILE
QUESTIONNAIRE
TIME HORIZON
2. Once I begin withdrawing funds from my
investments, I plan to spend all of the funds in:
a. Less than 2 years 0
b. 2-5 years 1
c. 6-10 years 4
d. 11 years or more 8
 SAMPLE INVESTOR PROFILE
QUESTIONNAIRE
TIME HORIZON
A score less than 3 indicates a very short
investment time horizon. For such a short time
horizon, a relatively low-risk portfolio of 40%
short-term (average maturity of 5 years or less)
bonds or bond funds and 60% cash investments
is suggested, as stock investments may be
significantly more volatile in the short term.
 SAMPLE INVESTOR PROFILE
QUESTIONNAIRE
RISK TOLERANCE
3. I would describe my knowledge of
investments as:
a. None 1
b. Limited 3
c. Good 7
d. Extensive 10
 SAMPLE INVESTOR PROFILE
QUESTIONNAIRE
RISK TOLERANCE
4. When I invest my money, I am:
a. Most concerned about my investment losing
value 0
b. Equally concerned about my investment
losing or gaining value 4
c. Most concerned about my investment
gaining value 8
 SAMPLE INVESTOR PROFILE
QUESTIONNAIRE
RISK TOLERANCE
5. Select the investments want to own:
a. Bonds and/or bond funds 3
b. Stocks and/or stock funds 6
c. International Securities and/or international
funds 8
 SAMPLE INVESTOR PROFILE
QUESTIONNAIRE
RISK TOLERANCE
6. Consider this scenario: Imagine that in the past
three months, the overall stock market lost 25% of
its value. An individual stock investment you own
also lost 25% of its value. What would you do?
a. Sell all my shares 0
b. Sell some of my shares 2
c. Do nothing 5
d. Buy more shares 8
 SAMPLE INVESTOR PROFILE
QUESTIONNAIRE
RISK TOLERANCE
7. Review the chart below:
PLAN AVE. ANNUAL BEST-CASE WORST-CASE POINTS
RETURN
A 7.2% 16.3% -5.6% 0
B 9.0% 25.0% -12.1% 3
C 10.4% 33.6% -18.2% 6
D 11.7% 42.8% -24.0% 8
E 12.5% 50.0% -28.2% 10
RESULTS:
SELECT AN INVESTMENT STRATEGY:
 ECONOMIC INDICATORS
THAT AFFECT INVESTMENTS
- Gross Domestic Product (GDP)
- Unemployment Rate
- Consumer Price Index (CPI)
- Monetary Policy
- Government Regulation/Fiscal Policy
- Interest Rates
 PORTFOLIO CONSTRUCTION
Asset Allocation: It is the process of deciding
how to distribute an investors 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 risk/return relationships.
Investor: Depending on the type of investors,
investment objectives and constraints vary
 PORTFOLIO CONSTRUCTION
1. Know your Client
Focus: Investors Profile, Investors short-term and long-term
needs, familiarity with capital market history, and
expectations
2. Examine current and project financial, economic, political,
and social conditions
Focus: Short-term and intermediate-term expected conditions
to use in constructing a specific portfolio
3. Implement the plan by constructing the portfolio
Focus: Meet the investors needs at the minimum risk levels
4. Feedback loop: Monitor and update investor needs,
environmental conditions, portfolio performance
 PORTFOLIO CONSTRUCTION
Know your Client
Specifies investment goals and acceptable risk levels
Should be reviewed periodically
Guides all investment decisions
Study Current Financial and Economic conditions
and forecast future trends
Determine strategies to meet goals
Requires monitoring and updating
 PORTFOLIO CONSTRUCTION
Construct the Portfolio
Allocate available funds to minimize investors
risks and meet investment goals
Monitor and Update
Evaluate portfolio performance
Monitor investors needs and market conditions
Revise policy statement as needed
Modify investment strategy accordingly
 PORTFOLIO CONSTRUCTION
Constructing the policy statement begins with a
profile analysis of the investors current and
future financial situations and a discussion of
investment objectives and constraints.
Objectives
Risk
Return
Constraints
Liquidity, time horizon, tax factors, legal and
regulatory constraints, and unique needs and
preferences
 PORTFOLIO CONSTRUCTION
Understand investors needs and articulate
realistic investment objectives and constraints
What are the real risks of an adverse financial
outcome, and what emotional reactions will I have?
How knowledgeable am I about investments and the
financial markets?
What other capital or income sources do I have? How
important is this particular portfolio to my overall
financial position?
What, if any, legal restrictions affect me?
How would any unanticipated portfolio value change
might affect my investment policy?
 PORTFOLIO EVALUATION
Sets standards for evaluating portfolio
performance
The statement provides a comparison standard in
judging the performance of the portfolio manager.
A benchmark portfolio or comparison standard is used
to reflect the risk an return objectives specified in the
policy statement.
It should act as a starting point for periodic portfolio
review and client communication with the manager.
 PORTFOLIO EVALUATION
CONVENTIONAL METHODS
- Benchmark Comparison: comparison of the
performance of an investment portfolio
against a broader market index
- Style Comparison: comparison of return of
portfolio with that having a similar investment
style
 PORTFOLIO EVALUATION
RISK-ADJUSTED METHODS
- Sharpe Ratio
- Treynor Ratio
- Jensens Alpha
- Modigliani and Modigliani Measure
- Treynor Squared