CFP

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Investment Theory and Portfolio Development - Appropriate Benchmarks and Probability Analysis

Appropriate Benchmarks
A valid benchmark should be unambiguous, investable, measurable and appropriate for the manager's style and experience, reflect current investment opinions, be specified in advance and exhibit the investment manager's ownership. The planner needs to choose an index carefully when attempting to measure the performance of an investment manager accurately. The construction of many benchmarks is often arbitrary. When improperly used, benchmarks may provide an incorrect and misleading metric for the analyst, resulting in an unduly optimistic or pessimistic view of a manager's performance.

Probability Analysis
Includes analytical tools and uses advanced software and mathematics applications to model possible outcomes for the investor. Monte-Carlo analysis is a widely used analytical tool that employs mean-variance optimization to product various outcomes for goal-based retirement investment planning or other goals. The end result should be an efficient portfolio for the client that maximizes return for a given level of risk with which the client is most comfortable. Such analysis gives the individual perspective on what s/he needs to do to attain their objectives, be it increase savings, avoid overconcentration of investments, etc.

Program Inputs include:

  1. Economic Variables
    1. Selection of asset classes.
    2. Expected returns for each asset class selected.
    3. Standard deviation (total risk) of each asset class.
    4. Degree of correlation amongst the asset classes chosen.
  2. Client Variables
    1. Risk tolerance/return objective.
    2. Time Horizon.
    3. Tax considerations.
    4. Legal constraints.
    5. Unique considerations.


Program Outputs:

    1. Asset allocation based upon the asset classes chosen.
    2. Expected before-return of the portfolio.
    3. Expected after-tax return of the portfolio.
    4. Expected standard deviation of the portfolio.
    5. The portfolio's efficient frontier.
Tax Efficiency

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