O Chapter 15 Choosing an appropriate investment strategy

Question 1

What criteria should an investment objective for an institutional investor satisfy?

Answer 1

Clearly stated
Quantifiable
Fra med i n terms of risk, total required return and timing of cashflows

Question 2

Give 4 examples of possible investment objectives for an institutional investor

Answer 2

To meet the liabilities as the fall due
To control the incidence of future obligations on a third party (e.g. employer pension contributions)
To provide sufficient funds to be able to demonstrate ability to meet the liabilities as they fall due (can be on statutory or realistic basis).
To demonstrate that there are sufficient funds to meet the liabilities if discontinuance where to occur.

Question 3

Give three examples of how risk might be defined for an institutional investor.

Answer 3

Standard deviation or volatility of return from an investment (MVPT/CAPM)
The probability of ruin (or complete failure of an investment)
The probability of failing to achieve the investor’s objectives. Default

Question 4

On what 3 things does the risk appetite of an institutional investor depend?

Answer 4

The nature of the organization
The constraints of its governing body and documentation
Legal or statutory controls