The Portfolio Management Process: The Need For A Policy Statement

THE PORTFOLIO
MANAGEMENT PROCESS:
THE NEED FOR A POLICY
STATEMENT
Prepared By: Umme Kulsoom
Government College Women University, Faisalabad
• Subject Name: Investment and Portfolio Management

• Course Code: BBA-
• Instructor Name: Umme Kulsoom
• Class & Section: BBA 7th (B)
• Chapter Name: The Asset Allocation Decision
• Lecture No: 12
Learning outcomes
After studying this chapter students will be able to explain;
• The portfolio management process
• The need for a policy statement
• Understand and articulate realistic investors goals
• Standard for evaluating portfolio performance
• Other benefits
THE PORTFOLIO MANAGEMENT PROCESS
The process of managing an investment portfolio never

stops. Once the funds are initially invested according to the
plan, the real work begins in evaluating the portfolio’s
performance and updating the portfolio based on changes in
the economic environment and the investor’s needs.
THE NEED FOR A POLICY STATEMENT
• A policy statement is a road map that guides the investment

process.
• A policy statement will provide discipline for the investment
process and reduce the possibility of making hasty,
inappropriate decisions.
• There are two important reasons for constructing a policy
statement:
1) First, it helps the investor decide on realistic investment goals

after learning about the financial markets and the risks of
investing;
2) Second, it creates a standard by which to judge the
performance of the portfolio manager.
Understand and Articulate Realistic Investor Goals
Writing a policy statement is to help investors understand

their own needs, objectives, and investment constraints.
This background will help prevent them from making

inappropriate investment decisions.
The policy statement helps the investor to specify realistic

goals and become more informed about the risks and costs
of investing.
One expert in the field recommends that investors should think about
the following set of questions and explain their answers as part of
the process of constructing a policy statement:
1. What are the real risks of an adverse financial outcome, especially
in the short run?
2. What probable emotional reactions will I have to an adverse
financial outcome?
3. How knowledgeable am I about investments and financial
markets?
4. What other capital or income sources do I have? How important is
this particular portfolio to my overall financial position?
5. What, if any, legal restrictions may affect my investment needs?
6. How would any unanticipated fluctuations in my portfolio value
affect my investment policy?
Standards for Evaluating Portfolio Performance
The policy statement also assists in judging the

performance of the portfolio manager.
The policy statement will typically include a benchmark

portfolio, or comparison standard.
Other Benefits
A sound policy statement helps to protect the client against a

portfolio manager’s inappropriate investments or unethical
behavior.
A policy statement should prevent delays in monitoring and

rebalancing your portfolio and contribute to a seamless
transition from one money manager to another.
A clearly written policy statement helps avoid potential

problems.
An appropriate policy statement should satisfactorily answer

the following questions:
1. Is the policy carefully designed to meet the specific

needs and objectives of this particular investor?
2. Is the policy written so clearly and explicitly that a
competent stranger could use it to manage the portfolio
in conformance with the client’s needs?
3. Would the client have been able to remain committed to
the policies during the capital market experiences of the
past 60 to 70 years?
4. Would the portfolio manager have been able to maintain
the policies specified over the same period?
5. Would the policy, if implemented, have achieved the
client’s objectives?
References
• Investments Analysis and Portfolio

Management by Reilly and Brown
• Thank You
• Best of Luck for the Learning Process

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THE PORTFOLIO

Government College Women University, Faisalabad

• Subject Name: Investment and Portfolio Management

THE PORTFOLIO MANAGEMENT PROCESS

The process of managing an investment portfolio never

THE NEED FOR A POLICY STATEMENT

• A policy statement is a road map that guides the investment

1) First, it helps the investor decide on realistic investment goals

Understand and Articulate Realistic Investor Goals

Writing a policy statement is to help investors understand

This background will help prevent them from making

The policy statement helps the investor to specify realistic

Standards for Evaluating Portfolio Performance

The policy statement also assists in judging the

The policy statement will typically include a benchmark

A sound policy statement helps to protect the client against a

A policy statement should prevent delays in monitoring and

A clearly written policy statement helps avoid potential

An appropriate policy statement should satisfactorily answer

1. Is the policy carefully designed to meet the specific

• Investments Analysis and Portfolio

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