THE SPECIFICATION OF INVESTMENT POLICY

THE SPECIFICATION OF INVESTMENT POLICY

THE SPECIFICATION OF INVESTMENT POLICY

THE SPECIFICATION OF INVESTMENT POLICY

Investment counsellors and trustees do not ignore the choice ofinvestment policy. In fact, they typically produce a written statementof policy and occasionally refer to it. Current practice deserves criti cism not only because of the casual, intuitive process by which policyis chosen, but also because of the ambiguity and vagueness of its expression. These deficiencies are often so pronounced that the policyneither provides meaningful guidance to the portfolio manager northe effective means for controlling him and evaluating hisperformance.

Click Here To: Protect Your Investments Today!

Many trust departments and investment counselling firms rely onthree criteria to give operational meaning to statements of policy :

1.A list of securities eligible for purchasethe so-called "buy" list.

2.A diversification requirement, usually specifying the maximum

percentage of a portfolio that can be invested in the securities

of a single company and the maximum percentage that can be

invested in a single industry.

3.A maximum percentage that can be invested in equities.

These three criteria are designed to restrict investments to undervalued securities, to control risk through diversification and a maximum commitment to equities, and to deal with the timing problemby changing the maximum permissible commitment to equities. Although there is remarkably little evidence that "buy lists" outperform other securities of similar risk, the three criteria combined do provide some control over portfolio managers.

Click Here To: Protect Your Investments Today!

Yet, the control is crude and inexact. Portfolios can be and areconstructed from the same "buy list," with the same percentage in equities and full compliance with the criteria for diversification, and yet have quite different characteristics. More than one trust department and investment counselling firm foresaw the 196970 bear mar ket and sought unsuccessfully to effect appropriate modifications in portfolios through changes in "buy lists" and reductions in maximum,permissible levels of investment in equities. The control mechanismfrequently failed, if portfolio managers, not sharing the pessimism oftheir policy makers, shifted to equities more sensitive to market movements than those previously held. Reducing the proportion of a portfolio in equities from 80 percent to 60 percent will not make theportfolio less vulnerable to a market decline, if the equities held havesubstantially higher beta coefficients than those formerly held.

A more precise prescription of policy could be achieved throughthe use of beta coefficients and correlation coefficients. The prescrip tion of a beta coefficient would perform two functions. It would control the relative riskiness of all portfolios and would permit a controlledadjustment in absolute levels of systematic risk in response to convictions of policy makers regarding future, major market movements.The prescription of a correlation coefficient would control diversification and thus the proportions of total risk that would be unsystematicthat is, caused by something other than movements in themarket. A "buy list" can also be used, but its value should be frequently tested.

POST COMMENT

3 Eligibility Requirements For The Green Card By Investment Steel Farm Sheds Protecting Your Investments Trend of Property Investment Top rated Investments and Inventory Picks for 2006 Apply Your Eb-5 Visa Investment To A Regional Center With Breathtaking Surroundings Condotel Investments in the Philippines Downtown Playa del Carmen Condo – Excellent Investment, $170,000 Lucrative Investment Platform Income investments in oil and Gas Safe Investment in oil with savvy royalties Ministry of Industry and SMEs, to encourage qualified foreign investment and mergers and acquisitions - small and medium enterprises, foreign Make Your Eb5 Investment In The Film And Television Industry Obtaining An Eb5 Investment Visa At A California Regional Center