Asset Allocation and Insto Investors

Question 1

Investment objective and constraint

Answer 1

Investment objective distinguishes an optimal solution from a suboptimal solution.

Constrain - a condition that any solution must meet

Question 2

Expected utility function

Answer 2

Investor is risk averse and utility function is concave.

Question 3

Interval and external constraints

Answer 3

Internal: liquidity, time horizon, sector, country limits

External: tax status, regulation

Question 4

IPS components, 7

Answer 4

Background
Objective
Asset classes
Governance
Manager selection
Reporting and monitoring
Strategic asset allocation

Question 5

Forgone loss carry forward

Answer 5

When an existing investor loses the fee benefits of owning a fund below high water mark

Question 6

Leverage aversion theory

Answer 6

Large classes of investors can’t lever up low vol portfolios to generate attractive returns so low vol stocks and portfolios are often under priced

Question 7

Vol anomaly

Answer 7

Low vol stocks are under priced and therefor offer a higher expected risk adjusted return

Question 8

Endowment return attribution

Answer 8

Constructions from strategic asset allocation (15%) + security selection (70%) + market timing/tactical asset allocation (14%)

Question 9

Balance of payments SWF

Answer 9

Reserve accounts = current account + capital account. Change in absolute $ terms.

Reserve account = holdings of foreign currency
Current account = exports-imports of goods
Capital account = imports-exports of capital

Question 10

Countries currency appreciates

Answer 10

If it has low inflation, high interest rates, policies that attract capital and slow income growth the reduces demand for imports

Question 11

SWF - stabilisation fund

Answer 11

Counter cyclical purpose through collecting excess commodity revenues during times of high prices and distributing saved wealth during times of low prices.

Conservative fixed income focus

Eg.

Question 12

SWF - savings fund

Answer 12

Investing today’s commodity revenues into a total return fund for future generations.

Eg. Norges

Question 13

SWF - development funds

Answer 13

Socioeconomic objectives - economic diversification, development of strategic industries and poverty alleviation.

Eg Singapore Temasek

Question 14

SWF - reserve investment fund

Answer 14

Included in a countries reserve accounting, funds invest in a total return portfolio to overcome the opportunity costs of the cash and FI focused stabilisation funds.

Eg. CIC

Question 15

FO equity holdings risk

Answer 15

GROWTH is the largest risk, 51%

Question 16

Beta drivers of return for DB pension

Answer 16

Plan may accept beta risk to improve returns. Investment risk and liquidity are beta drivers of return.

Question 17

Endowment success primarily attributed to:

Answer 17

Security selection.

Attribution=strategic asset allocation+security selection+market timing.

Highest weighting is security selection