1. McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 26-1 The Process of Portfolio Management Chapter 26

2. McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 26-2 ObjectivesConstraintsPolicies Return RequirementsLiquidityAsset Allocation Risk ToleranceHorizonDiversification RegulationsRisk Positioning TaxesTax Positioning Unique NeedsIncome Generation Determinants of Portfolio Policies

3. McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 26-3 Type of InvestorReturn RequirementRisk Tolerance Individual and Personal Trusts Life CycleLife Cycle Mutual FundsVariableVariable Pension FundsAssumed actuarial rateDepends on payouts Endowment FundsDetermined by income Generally needs and asset growth to conservative maintain real value Matrix of Objectives

4. McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 26-4 Type of InvestorReturn RequirementRisk Tolerance Life InsuranceSpread over cost of Conservative funds and actuarial rates Nonlife Ins. Co. No minimum Conservative BanksInterest Spread Variable Matrix of Objectives (cont’d)

5. McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 26-5 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 needs Constraints on Investment Policies

6. McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 26-6 Managing Portfolios of Individual Investors Overriding consideration is life cycle. Needs for current income Appropriate level of risk Appropriate level and type of life insurance Taxes and tax planning

7. McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 26-7 Tax 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

8. McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 26-8 Pension Funds Basic types of plans -Defined contribution plans -Defined benefit plans Pension investment strategies -Defined contribution versus defined benefit -Contingent immunization -Investing in equities

9. McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 26-9 Future Trends in Portfolio Management Increased use of inflation-indexed bonds. More direct management of funds by individuals. More companies offering structured financial products.