Chapter 15: Choosing an appropriate investment strategy

Question 1

when defining investment risk, we need to consider:

Answer 1

the time period being considered
whether the returns are measured in real (i.e. net of inflation) or nominal terms.
The currency in which we measure returns.

Question 2

The risk appetite of an institution will depend on:

Answer 2

the nature of the institution
the constraints of its governing body and documentation legal or statutory controls.

Question 3

main factors that will influence a long-term investment strategy are:

Answer 3

Liabilities:
the nature of the existing liabilities – whether they are fixed in monetary terms, real or varying in some other way
the currency of the existing liabilities the term of the existing liabilities
the level of uncertainty of the existing liabilities – both in amount and timing
tax and expenses – both the tax treatment of different investments and the tax position of the investor need to be considered
statutory, legal or voluntary restrictions on how the fund may invest the size of the assets, both in relation to the liabilities and in absolute terms the expected long-term return from various asset classes accounting rules
statutory valuation and solvency requirements future accrual of liabilities
the existing asset portfolio
the strategy followed by other funds the institution’s risk appetite the institution’s objectives
the need for diversification environmental, social and governance (ESG) considerations.

Question 4

The main factors that an individual should consider before investing are:

Answer 4

their assets and liabilities and matching cashflows
risks arising, in particular the variability of market values
returns from different asset classes
constraints, both investment and practical constraint

Question 5

Practical constraints individual investors may face

Answer 5

not enough assets for direct investment in some asset classes,
high relative expenses when investing small amounts, and
lack of information and/or expertise.