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Ch. 2 PORTFOLIO CONSTRUCTION I. Investment policy statement A. Setting objectives

Ch. 2 PORTFOLIO CONSTRUCTION I. Investment policy statement A. Setting objectives 1. Prioritize goals a. High vs. low b. Long-term vs. short-term 2. Level of risk 3. Portfolio objective a. Capital preservation

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Ch. 2 PORTFOLIO CONSTRUCTION I. Investment policy statement A. Setting objectives

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  1. Ch. 2 PORTFOLIO CONSTRUCTION I. Investment policy statement A. Setting objectives 1. Prioritize goals a. High vs. low b. Long-term vs. short-term 2. Level of risk 3. Portfolio objective a. Capital preservation b. Capital appreciation 4. Return level & form a. Income b. Total B. Establishing investment constraints 1. Time horizon 2. Liquidity 3. Tax considerations 4. Regulatory considerations 5. Unique circumstances

  2. ASSET ALLOCATION I. Decisions A. Strategic 1. Long-term asset mix 2. Single most impt. decision 3. Approaches a. Optimization: efficient frontier b. Constant (static) mix c. Integrated B. Tactical 1. Short-term departures from strategic allocation 2. Approaches a. Risk-premium 3. Relative measures a. Yield gap II. State of the art/science

  3. ASSET ALLOCATION PROCESS I. Eligible asset classes A. Equities 1. Capitalization 2. Valuation: value/growth B. Bonds 1. Treasury 2. Corporate 3. Mortgage-backed 4. Municipals C. International 1. Equities 2. Fixed income D. Real estate 1. Properties 2. REITS E. Alternative 1. Gold 2. Venture capital 3. Hedge funds II. Investment policy asset class weights: strategic III. Allocation ranges for asset classes: tactical

  4. INVESTOR LIFE CYCLE (ILC) I. Allocation of asset classes over ILC A. Accumulation phase 1. Capital appreciation 2. Diversified portfolio tilted toward risky assets B. Consolidation phase 1. Capital preservation more impt. 2. Diversified (balanced) portfolio of moderate-risk assets C. Spending phase 1. Diversified portfolio tilted toward income producing assets 2. Less risky than consolidation but still includes growth investments D. Gifting phase (concurrent with spending) 1. Provide gifts to family, friends 2. Establish trusts 3. Investment implications: same as spending

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