Question

1. Explain briefly why it is prudent for investors to create an Investment Policy Statement (IPS) when working with a financial advisor
2. Describe the strategic asset allocation you would recommend for a 45-year old investor who just won $50,000 and plans to invest it all. She has negligible personal debt but also no savings, despite wanting to retire at age 65. Her job does not pay particularly well but she also has no children to take care of. She lacks any type of financial education whatsoever but is not particularly averse to risk.
3. Assuming that you forecast a peak in economic activity over the next few months, what kind of tactical shifts would you make for the portfolio above? (1 mark)
4. If you believed that despite the peak in the broad market that shares in Potash Corp. would continue to outperform the Canadian mining sector, describe how you would structure a position to take advantage of its relative outperformance (1 mark). Also, how will the R² of Potash Corp.'s returns with those of the Canadian mining sector will impact this trade. (1 mark)
5. Why is international diversification less effective today at reducing portfolio risk than it was 50 years ago?

Answer 1

Investment Policy Statement is a written document which states the following agreed upon terms between and investor and his financial advisor:

1. risk tolerance level over the investment horizon

2. investor's financial goals

3. regulatory requirements

4. unique clauses regarding extraordinary happenings

5. procedures and responsibilities

This is an effective tool which sets forth the expectations between an investor and his advisor.

1. Especially effective in unpredictable market. Enables planning for relevant asset allocation, risk management, portfolio monitoring etc

2. Both the investor and the advisor can go about implementing proper risk profiling and stick to the same

3. Enhances client-advisor relationship and fosters an environment of responsibility and accountability.

4. Road map for making future investment decisions.

5. Continuous supervising, monitoring and evaluating the objectives of the investor.