CHAPTER 2Client Objectives for Diversified Portfolios
Chapter Outline
- 2.1 Introduction
- 2.2 Definitions of Risk
- 2.3 The Portfolio Management Process and the Investment Policy Statement
- 2.4 Institutional Investors
- 2.5 Individual Investors
- 2.6 Asset Class Portfolios
2.1 INTRODUCTION
Portfolio management is about delivering investment performance that enhances clients' abilities to achieve their financial goals. Therefore, understanding clients and their situations is the first step in effective portfolio management. What do the clients need? What do they want? What are their preferences? What can they tolerate? And, of course, what are their current financial situations?
This chapter focuses on understanding clients, assessing their circumstances, and translating that information into actionable blueprints for portfolios. Investment Policy Statements (IPSs) summarize the understanding between clients and their advisors. In a sense an IPS is like a legal contract: Everything that is expected of each party should be spelled out as clearly as possible in the IPS.
While investment returns are easily stated, investment risk means different things to different people. We therefore begin the chapter with a discussion of alternative notions of risk and associated measures of risk. Section 2.3 outlines the steps of the portfolio management process and discusses the details of the IPS. Section 2.4 focuses on institutional investors—specifically foundations, ...