The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

KEY POINTS

• The investment management process involves setting investment objectives, establishing an investment policy, selecting an investment strategy, constructing the portfolio, and measuring and evaluating investment performance.

• Investment objectives can be either based on some benchmark or liabilities.

• Investment policy begins with the decision as to how to allocate funds across the major asset classes taking into consideration client-imposed and regulatory constraints.

• In selecting a portfolio strategy that is consistent with its investment objectives, a client can select an active strategy or a passive strategy. The selection of a strategy depends on the client’s view of the pricing efficiency of the market, as well as the client’s risk tolerance.

• The portfolio construction task involves assembling assets so as to create an efficient portfolio: a portfolio that provides the greatest expected return for the target level of risk.

• In evaluating performance, return attribution analysis should be used. This tool allows a client to understand why a portfolio manager may have underperformed or outperformed a benchmark.

• Performance measurement involves computing the return over some time period.

• The three methods for computing a return over some evaluation period based on averaging subperiod returns are the arithmetic average rate of return, time-weighted rate of return, and dollar-weighted return. The last two measures will produce the same result if no withdrawals ...