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CFA LEVEL 3 Summary (Portfolio Management (Institutional (IPS of…

- - - - Situational profiling
        
        Sources of wealth
        
        Entrepreneurial -> risk taking
        
        Inheritance
  - - - Defined Benefit
        Pros
        Employee:
        
        No investment risk
        Employer:
        
        can support company stock by purchasing company's stock to the plan
        
        Cons
        Employee:
        
        Early termination risk
        
        No diversification
        Employer:
        
        Investment risk
        
        Liquidity required
        
        Highly regulated
      - Defined Contribution
        Pros
        Employee:
        
        own the contribution both personal and sponsor's (after vested)
        
        can be transferred
        
        can be diversified
        
        lower tax
        Employers:
        
        No investment risk
        
        Lower liquidity requirement
        
        fewer regulations
        
        Cons
        Employee:
        
        investment risk
        
        have to monitor and relocation by themselves
        Employer:
        
        Legally required IPS
      - Ability to take risk of Defined benefit plan
        
        Positively related to
        
        surplus
        
        quality of sponsors balance sheet
        
        Negatively related to
        
        age of worker
        
        Early retire
    - - Defined Benefit/Contribution plan
        
        Return Obj.:
        
        Actuarial rate
        
        Cap gain focus >> low liquidity needs and young work force
        
        Income focus >> high liquid need, old workers
        
        Risk Tolerance:
        
        Positively related with surplus, time horizon, company balance sheet
        
        Negatively related with age of workers
        
        Constraints:
        - Liquidity: Depend on age of workers and no. of retiree
        - Time horizon: long of going concern, short if terminate plan
        - Legal: ERISA, prudent expert rule
        - Tax: None
        - Unique circumstance: Case by case
      - Foundation
        
        Return Obj:
        
        Spending rate + mgmt fee + Inflation
        Risk Tolerance
        
        Normally >> Moderate - High depending on spending rate and time horizon
        Liquidity:
        
        some hold percentage of annual distn as cash reserve
        Time - horizon
        
        long, mostly infinite
        Legal Regulatory
        
        Few, prudent investor rule
        Tax
        
        Few
        Unique circumstance
        
        Mostly moral and ethic concern
      - Endowment funds
        
        Return:
        
        balanced btw need for current income and L-T principal protection
        Risk tolerance
        
        Moderate to high, depend on spending need
        Liquidity
        
        hold percentage of annual distn as cash reserve
        Time horizon
        
        long usually infinite
        Legal:
        
        Low, prudent investor rule
        Tax:
        
        None
        Unique Circumstance:
        
        Restricted on some securities or A/S classes due to nature of fund
        
        Spending rule: (for both Foundation and Endowment)
        
        Simple >> S(market value)
        
        Rolling 3-year >> spending rate(average market value of preceding 3 years)
        
        Geometric >> give less weight to older spending