Optimal portfolio selection, Financial Management

Optimal Portfolio Selection:

The next step involves selecting the optimal portfolio. The strategic asset allocation will have overriding importance in pension fund management. Asset classes will be selected on the basis of their match with liabilities in terms of correlation and volatility, rather than on the basis of expected return. Every pension scheme will have a scheme-specific funding standard that reflects the maturity structure of the liabilities of the scheme. The optimal portfolio selection consists of various techniques of modeling the efficient frontier; selecting the optimal portfolio based on the expected risk and return is one of the best possible methods.

Risk Sensitivity Analysis

Once the portfolio has been selected and implemented, a risk sensitivity analysis of the same under different possible parameters must be made; and accordingly, the asset-liability management techniques have to be decided upon and implemented.

Review of the Investment Policy

Following the risk sensitivity analysis of the portfolio, the investment policy must be reviewed to decide whether it complies with the fund's mission, risk tolerance factors, investment objectives, policy asset mix, investment manager structure and also whether it complies with the standards set in the performance evaluation.

Optimization of the Manager Structure

This involves deciding the type of manager required to head the fund, whether active or passive, balanced or specialist, etc. Different funds have different investment objectives and as such the same type of manager may not suit all the pension fund structures. Once the decision is made, the selection process of the manager must be initiated.

Performance Monitoring and Evaluation

The final step is monitoring the performance, both quantitatively and qualitatively. This includes attribution and style analysis, compliance with the policies; and it is not limited to the fund itself, but also involves monitoring the status of the capital markets and the status of satisfaction of the investors. Risk Adjusted Net Value Added (RANVA), EVA, and VAR are some important tools to measure the performance of the pension fund.

 

Posted Date: 9/11/2012 1:38:14 AM | Location : United States







Related Discussions:- Optimal portfolio selection, Assignment Help, Ask Question on Optimal portfolio selection, Get Answer, Expert's Help, Optimal portfolio selection Discussions

Write discussion on Optimal portfolio selection
Your posts are moderated
Related Questions
On Completion of her introductory finance course, Kieran was so pleased with the amount of useful and interesting knowledge she gained that she convinced her parents, who were weal

Role of Financial Intermediaries in the financial system: Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor

1. A standard arrangement for the orderly retirement of long-term debt calls for the corporation to make regular payments into a(n):      A)  custodial account.     B)  sinking

Your family purchased a house three years ago. When you bought the house you financed it with a $160,000 mortgage with an 8.5% nominal interest rate (compounded monthly). The mortg

Functional Classification of Mutual Funds Functional classification of Mutual Funds is based on the basic characteristics of the mutual fund schemes for subscription. Mutual Fu

Q. What is Adjusted Gross Income? Adjusted Gross Income - Gross income decreased by business and other specified expenses ofindividual taxpayers. Amount of adjusted gross incom

Q. Types of financial statement analysis? 1) External analysis This analysis is performed by external stakeholders like lenders, suppliers, investors, and governments. 2)

On January 1 a bond with face value of $1,000 is for sale in the market.  That bond has a coupon rate of 6%, pays interest only once a year and the end of the year, and matures at


Step 1) Opportunity Set Graph:Combine 2 of your stocks (Ignore the other 2 stocksfor this step only).  Construct an investment opportunity set (the curved set) between the two risk