2. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 24 Portfolio Planning and Management

3. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Financial Planning Specification of investment goals such as –funds for emergencies –funds for future purchases –funds for retirement

4. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Financial Life Cycle Period of accumulation Period of preservation Period of depletion

5. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Analysis of Resources After specifying the goals, the individual should –understand the investment alternatives –analyze his/her financial position –establish a financial plan

6. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Individual Financial Statements The individual's balance sheet The individual's cash budget Present and forecasted financial statements

7. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Financial Plans Financial plans should be –monitored –altered as conditions/goals change Assistance may be obtained from a professional financial planner

8. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Asset Allocation Distribution of assets among alternatives to achieve investment goals Varies at different stages of life Changes with the individual's financial condition Affects the return earned on the portfolio

9. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Active vs Passive Portfolio Management Self-administration versus delegation Importance of the belief in efficient markets Importance of risk-management strategies

10. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Use of Mutual Funds Important considerations when selecting a fund –fees –expenses –taxation and tax efficiency –timing of distributions

11. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Mutual Fund Considerations Age of the fund Consistency of returns Redeeming shares

12. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Risk-Adjusted Returns The Jensen alpha The Treynor index The Sharpe index

13. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Appropriate Benchmarks S&P 500 stock index for large companies Specialized indices for specialized portfolios

14. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Index and Exchange-Traded Funds (ETFs) Efficient markets argues for index funds Exchange-traded funds are index funds whose shares actively trade in secondary markets