CRPC: MOD 2- CHAPTER 1:
INVESTMENT POLICY + CHAPTER 2:
ASSET CLASSES, CHARACTERISTICS
AND PERFORMANCE QUESTIONS AND
ANSWERS
Whatjcarejcthejc2jcpurposesjcofjcthejcinvestmentjcPolicy?jc-jcanswer--
1.jcTojcprovidejcajcfoundationjcofjcgoals,jctimejchorizon,jcandjcconstraintsjconjcwhichjcthejccli
entjcportfoliojcisjcconstructed;jcand
2.jcTojcprovidejcajcbasisjcforjcreview,jcperformancejcevaluation,jcandjcadaptionjctojcchangin
gjcconditions.
Whatjc3jcattributesjcmakejcupjcajcsoundjcinvestmentjcpolicy?jc-jcanswer--
1.jcPolicyjcmustjcbejcrealistic.jc(Tamingjcunrealisticjcexpectations)
2.jcPolicyjcshouldjchavejcajclongjctermjcperspective
3.jcPolicyjcmustjcbejcclearlyjcdefined.
Whatjcarejcthejc5jcessentialjcelementsjcofjcanjcinvestmentjcpolicy?jc-jcanswer--
1.jcAjcclearjcstatementjcofjcthejcclient'sjcinvestmentjcgoal.
2.jcAjcstatementjcidentifyingjcthejcinvestmentjcvehiclesjcandjcinvestmentjcstrategiesjcdeem
edjcsuitablejc(andjcunsuitable)jcforjcthejcportfolio.jc
3.jcAjcstatementjcofjcthejcriskjcleveljcacceptablejctojcthejcclient,jcasjcwelljcasjchowjcriskjcwilljcbej
cmanagedjcorjccontrolled.
4.jcAjcstatementjcofjchowjcthejcclient'sjcassetsjcshouldjcbejcallocatedjcamongjcthejcsuitablejcc
lassesjcofjcinvestmentsjcandjcajcstatementjcofjcthejcphilosophyjcunderjcwhichjctheyjcshouldjc
bejcmanaged.jc(ShouldjcprovidejcPercentagejcrangesjcforjcthejcassetjcclassjcandjcthejctarge
tjcwithinjcthatjcrange.)
5.jcThejcprovisionjcperiodjcforjcperiodicjcreview.jc(Ex:jc"Investmentjcperformancejcwilljcbejcre
viewedjcannuallyjcusingjcappropriatejcobjectivejcbenchmarks)
CommonjcStockjc-jcanswer--
Ajcsharejcofjccommonjcstockjcrepresentsjcajcfractionaljcownershipjcinterestjcinjcthejcissuingjc
corporation.
Returnsjconjcstocksjccomejcinjcthejcformjcof:jc-jcanswer--
Capitaljcgrowthjcorjcappreciationjcandjcpossiblyjcdividends.
, Whatjcarejc3jcAdvantagesjcofjcstocks?jc-jcanswer--
1.jcOvertimejcstocksjchavejcoutperformedjcalmostjcalljcotherjcfinancialjcinstruments.
2.jcStocksjcarejcalsojcajcstrongjchedgejcagainstjcinflationjcoverjcthejclongjcterm,jcasjcmeasure
djcbyjc"realjcreturns."jc(Returnjc-jcinflation=jcrealjcreturn)
3.jcStocksjcissuejcdividendsjcwhichjcarejcbasedjconjctheirjcprofitability.jcIfjcprofitsjcgrow,jcstoc
kholdersjccanjcpotentiallyjcreceivejcdividendsjcthatjcincreasejcoverjctime,jcwhichjcisjcimporta
ntjcwhenjctryingjctojckeepjcupjcwithjcinflation.
BusinessjcRiskjc-
jcanswer--"unsystematicjcrisk"jcthatjcinvolvesjcthejcuniquejccharacterjcofjcthejccompanyjcan
djcthejcriskjcthatjcthejccompanyjcitselfjccouldjcbankrupt,jcmakingjcitsjcstockjcworthless.
Howjcdojcyoujcmitigatejcsystematicjcrisk?jc-jcanswer--
Holdingjcajcdiversifiedjcportfolio,jctypicallyjcatjcleastjc15jcdifferentjcissuesjcinjcdifferentjcindus
tries.jc"Notjcputtingjcalljcofjcyourjceggsjcinjconejcbasket."jcEvenjcthoughjcthejcstockjcofjconejcco
mpanyjcmightjcperformjcpoorly,jcitjcisjcnotjcweightedjcsojcheavilyjcthatjcitjcdragsjcthejcentirejcp
ortfoliojcdown.
Systematicjcriskjc(Stocks)jc-jcanswer--
Thisjcisjcthejcpossibilityjcthatjcanjcinvestorjcwilljcexperiencejclossesjcduejctojcfactorsjcthatjcaff
ectjcthejcoveralljcperformancejcofjcthejcfinancialjcmarketsjcandjcnotjcjustjcanjcindividualjcstoc
k.jcThisjcriskjccannotjcbejcreducedjcbyjcdiversification!jc
Ex:jcThejcterroristjcattacksjconjcSeptemberjc11,jc2001,jcpricesjcofjcalljcstocksjcfell,jcsojchaving
jc20-
30jcdifferentjcissuesjcwouldjcnotjchavejcprovidedjcprotectionjcagainstjcthejccollapsejcinjcstoc
kjcprices.
Whyjcwouldjcitjcbejcbeneficialjctojchavejcanjcallocationjcofjchighjcqualityjcstocksjcofjcupjctojc50
%jcforjcclientsjcinjcretirement?jc-jcanswer--
Duejctojclifejcexpectanciesjcforjcsomeonejcatjcagejc65.jcAjcclientjccouldjcpotentiallyjchavejc17-
20jcyearsjcafterjcretirementjctojclivejcoffjcofjctheirjcmoney.jcCanjcthesejcretireesjcaffordjc17-
20jcyearsjcofjclowjcreturns?jcStocksjchavejcbeenjcprovenjctojchedgejcinflation.
Whatjcarejc2jcstrategiesjcthatjccanjcbejcusedjctojcoffsetjcthejcvolatilityjcofjcstocksjcduringjcretir
ement?jc-jcanswer--1.jcSetjcasidejc3-
jc5jcyearsjcofjclivingjcexpensesjcinjcsafejcinvestmentsjcsuchjcasjcCDsjcandjchighjcqualityjcshor
tjctermjcbonds,jcandjcusejcthesejcfundsjcduringjcbearjcmarketjcperiods.jcThisjcpreventsjcthejc
necessityjcofjcsellingjcstocksjcwhenjcpricesjcarejclow.jc
2.jcUsejclowjccostjcfixedjcannuitiesjcasjcpartjcofjcthejcfixedjcincomejccomponentjcofjcyourjcportf
olio.jcFixedjcannuitiesjccanjcprovidejcfixedjcdollarjcpaymentsjcforjcasjclongjcasjcajcpersonjclive
s.jcTherefore,jcthejcindividualjccanjccountjconjcreceivingjcthisjccashjcflowjcregardlessjcofjcmar
ketjcfluctations.
ReinvestmentjcandjcCalljcRiskjc-jcanswer--
Issuerjccalljcrecalljcajcbondjcandjcpayjcthejcissuerjctheirjcprincipaljcbackjcbeforejcthejcmaturityj
cwhenjcthejcissuersjccanjcrefinancejcatjcajcratejclowerjcthanjcthejccouponjcrate.jc
INVESTMENT POLICY + CHAPTER 2:
ASSET CLASSES, CHARACTERISTICS
AND PERFORMANCE QUESTIONS AND
ANSWERS
Whatjcarejcthejc2jcpurposesjcofjcthejcinvestmentjcPolicy?jc-jcanswer--
1.jcTojcprovidejcajcfoundationjcofjcgoals,jctimejchorizon,jcandjcconstraintsjconjcwhichjcthejccli
entjcportfoliojcisjcconstructed;jcand
2.jcTojcprovidejcajcbasisjcforjcreview,jcperformancejcevaluation,jcandjcadaptionjctojcchangin
gjcconditions.
Whatjc3jcattributesjcmakejcupjcajcsoundjcinvestmentjcpolicy?jc-jcanswer--
1.jcPolicyjcmustjcbejcrealistic.jc(Tamingjcunrealisticjcexpectations)
2.jcPolicyjcshouldjchavejcajclongjctermjcperspective
3.jcPolicyjcmustjcbejcclearlyjcdefined.
Whatjcarejcthejc5jcessentialjcelementsjcofjcanjcinvestmentjcpolicy?jc-jcanswer--
1.jcAjcclearjcstatementjcofjcthejcclient'sjcinvestmentjcgoal.
2.jcAjcstatementjcidentifyingjcthejcinvestmentjcvehiclesjcandjcinvestmentjcstrategiesjcdeem
edjcsuitablejc(andjcunsuitable)jcforjcthejcportfolio.jc
3.jcAjcstatementjcofjcthejcriskjcleveljcacceptablejctojcthejcclient,jcasjcwelljcasjchowjcriskjcwilljcbej
cmanagedjcorjccontrolled.
4.jcAjcstatementjcofjchowjcthejcclient'sjcassetsjcshouldjcbejcallocatedjcamongjcthejcsuitablejcc
lassesjcofjcinvestmentsjcandjcajcstatementjcofjcthejcphilosophyjcunderjcwhichjctheyjcshouldjc
bejcmanaged.jc(ShouldjcprovidejcPercentagejcrangesjcforjcthejcassetjcclassjcandjcthejctarge
tjcwithinjcthatjcrange.)
5.jcThejcprovisionjcperiodjcforjcperiodicjcreview.jc(Ex:jc"Investmentjcperformancejcwilljcbejcre
viewedjcannuallyjcusingjcappropriatejcobjectivejcbenchmarks)
CommonjcStockjc-jcanswer--
Ajcsharejcofjccommonjcstockjcrepresentsjcajcfractionaljcownershipjcinterestjcinjcthejcissuingjc
corporation.
Returnsjconjcstocksjccomejcinjcthejcformjcof:jc-jcanswer--
Capitaljcgrowthjcorjcappreciationjcandjcpossiblyjcdividends.
, Whatjcarejc3jcAdvantagesjcofjcstocks?jc-jcanswer--
1.jcOvertimejcstocksjchavejcoutperformedjcalmostjcalljcotherjcfinancialjcinstruments.
2.jcStocksjcarejcalsojcajcstrongjchedgejcagainstjcinflationjcoverjcthejclongjcterm,jcasjcmeasure
djcbyjc"realjcreturns."jc(Returnjc-jcinflation=jcrealjcreturn)
3.jcStocksjcissuejcdividendsjcwhichjcarejcbasedjconjctheirjcprofitability.jcIfjcprofitsjcgrow,jcstoc
kholdersjccanjcpotentiallyjcreceivejcdividendsjcthatjcincreasejcoverjctime,jcwhichjcisjcimporta
ntjcwhenjctryingjctojckeepjcupjcwithjcinflation.
BusinessjcRiskjc-
jcanswer--"unsystematicjcrisk"jcthatjcinvolvesjcthejcuniquejccharacterjcofjcthejccompanyjcan
djcthejcriskjcthatjcthejccompanyjcitselfjccouldjcbankrupt,jcmakingjcitsjcstockjcworthless.
Howjcdojcyoujcmitigatejcsystematicjcrisk?jc-jcanswer--
Holdingjcajcdiversifiedjcportfolio,jctypicallyjcatjcleastjc15jcdifferentjcissuesjcinjcdifferentjcindus
tries.jc"Notjcputtingjcalljcofjcyourjceggsjcinjconejcbasket."jcEvenjcthoughjcthejcstockjcofjconejcco
mpanyjcmightjcperformjcpoorly,jcitjcisjcnotjcweightedjcsojcheavilyjcthatjcitjcdragsjcthejcentirejcp
ortfoliojcdown.
Systematicjcriskjc(Stocks)jc-jcanswer--
Thisjcisjcthejcpossibilityjcthatjcanjcinvestorjcwilljcexperiencejclossesjcduejctojcfactorsjcthatjcaff
ectjcthejcoveralljcperformancejcofjcthejcfinancialjcmarketsjcandjcnotjcjustjcanjcindividualjcstoc
k.jcThisjcriskjccannotjcbejcreducedjcbyjcdiversification!jc
Ex:jcThejcterroristjcattacksjconjcSeptemberjc11,jc2001,jcpricesjcofjcalljcstocksjcfell,jcsojchaving
jc20-
30jcdifferentjcissuesjcwouldjcnotjchavejcprovidedjcprotectionjcagainstjcthejccollapsejcinjcstoc
kjcprices.
Whyjcwouldjcitjcbejcbeneficialjctojchavejcanjcallocationjcofjchighjcqualityjcstocksjcofjcupjctojc50
%jcforjcclientsjcinjcretirement?jc-jcanswer--
Duejctojclifejcexpectanciesjcforjcsomeonejcatjcagejc65.jcAjcclientjccouldjcpotentiallyjchavejc17-
20jcyearsjcafterjcretirementjctojclivejcoffjcofjctheirjcmoney.jcCanjcthesejcretireesjcaffordjc17-
20jcyearsjcofjclowjcreturns?jcStocksjchavejcbeenjcprovenjctojchedgejcinflation.
Whatjcarejc2jcstrategiesjcthatjccanjcbejcusedjctojcoffsetjcthejcvolatilityjcofjcstocksjcduringjcretir
ement?jc-jcanswer--1.jcSetjcasidejc3-
jc5jcyearsjcofjclivingjcexpensesjcinjcsafejcinvestmentsjcsuchjcasjcCDsjcandjchighjcqualityjcshor
tjctermjcbonds,jcandjcusejcthesejcfundsjcduringjcbearjcmarketjcperiods.jcThisjcpreventsjcthejc
necessityjcofjcsellingjcstocksjcwhenjcpricesjcarejclow.jc
2.jcUsejclowjccostjcfixedjcannuitiesjcasjcpartjcofjcthejcfixedjcincomejccomponentjcofjcyourjcportf
olio.jcFixedjcannuitiesjccanjcprovidejcfixedjcdollarjcpaymentsjcforjcasjclongjcasjcajcpersonjclive
s.jcTherefore,jcthejcindividualjccanjccountjconjcreceivingjcthisjccashjcflowjcregardlessjcofjcmar
ketjcfluctations.
ReinvestmentjcandjcCalljcRiskjc-jcanswer--
Issuerjccalljcrecalljcajcbondjcandjcpayjcthejcissuerjctheirjcprincipaljcbackjcbeforejcthejcmaturityj
cwhenjcthejcissuersjccanjcrefinancejcatjcajcratejclowerjcthanjcthejccouponjcrate.jc
