Question

1. Describe two major factors that a portfolio manager should consider before designing an investment strategy. What types of decisions can a manager make to achieve these goals?

Answer 1

Answer) Following are the major factors that a portfolio manager should consider before designing an investment strategy.

1. Risk appetite of client-A strategy could be highly risky with high rewards or could be with low or medium risky with similar rewards,an investment manager must keep this risk profile in mind.
2. Time period of investment-What is the time period of investment,is it long period ,medium period or short period as based on that an investment manager can look for appropriate strategy.

Following are the decisions which manager can make to achieve these goals

1. Selection of right instrument based on risk appetite and time-If risk appetite is low,manager can select instruments which are less volatile but have less rxpected returns,similarly if time period is long manager can invest in stocks which look good for growth in next decade.
2. Target selection-If risk appetite is high,investment manager can set higher target returns,on the other hand for lower risk appetite,targets could be set as lower to ensure that investment is profitable,even if it is a small profit.
3. Diversification-If risk appetite is lower,portfolio could be highly diversified while in high risk appetite onus is on high return selected instruments,similarly for longer time frame,alot more assets can be selected but not for a shorter time frame.

Answer is complete.Thank you!