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Question 2

A. "The asset allocation decision is not an isolated choice; rather, it is a component of a portfolio management process." Discourse the process.

B. "The portfolio's performance should be compared to guidelines specified in the policy statement, not on the portfolio's overall return." - Elucidate the standards for evaluating portfolio performance.

Answer A

Portfolio asset allocation decisions may be made (prerogatively) independently or in isolation, but this is not advised. In portfolio management, conventional wisdom requires consideration and coordination in evaluating and selecting an appropriate asset portfolio which meets the specific goal(s) of an investor. The main steps in the portfolio management process are (Table #):

Step	Description
Planning	The most important process step, whereby objectives and constraints are identified (highlighting the outcome that an investor desires, considering returns and risks);
Investment policy statement	Creation of a formal document to record and regulate the decisions of investment, within the limitations of the investor's objectives, and agreement of the review cycle and cadence.
Capital market expectations	Formulation of the capital market expectation, which is essentially a forecast of the probable results that a portfolio configuration could achieve.
Asset allocation	Strategic and tactical allocation of assets within the portfolio. Strategic allocation considers the long-term performance forecast, while tactical considers the short-term forecast. The combination of both is used to assess the impact on the portfolio in both time domains.
Execution	Asset selection, portfolio arrangement, and final implementation. All prior process steps are used as inputs to this step.
Feedback	Evaluation of performance versus forecast, to inform decision machining and corresponding portfolio changes. This may involve taking no action, offloading of investments, replacements, or even increasing holdings. Measurement, trending and cyclic review are crucial. This step triggers a repeat of the cycle, to monitor and control.

Table #

Description of the portfolio management process steps. This process may be performed once-only, but for best results is advised to be cyclic.

Please help to answer these questions.

Source: Author, [others?].

[what is the name of this process? Who created it? Who is responsible for executing this process?]

[does it have any limitations, advantages or disadvantages? What can go wrong?]

[can this process be improved in any way? Are there any better examples of a process?]

[are there any case studies of good or bad process?]

Answer B

Portfolio performance must be evaluated, performance measured to assess effectiveness, project possible outcomes and realise the investor's objectives. While a portfolio's returns may be easily evaluated, said returns may not be aligned with the investment policy statement. For instance, superior returns may have been achieved by a portfolio, but if those returns have been generated by investments whose risk or qualities contravene the investment policy statement, the portfolio is jeopardised. Several methods exist, which are evaluated (Table #):

Method	Description	Advantages	Disadvantages
Benchmark comparison	Comparing performance against a market reference (perhaps the best prevailing portfolio).	The most direct method.	The benchmark reference may not be a close or suitable comparator, hence the results may be distorted.
Style comparison	Comparing performance against a similar portfolio benchmark.	More specifically targeted.
Risk-adjusted methods	Comparing performance against assorted risk level methods, including: Sharpe ratio (S); Treynor ratio (T) and Treynor Squared (T2); Jensen's alpha (a) Modigliani and Modigliani (M2)

Table #

Comparison of portfolio performance measurement methods, with advantages and disadvantages.

Please help to answer these questions.

Source: Author, [others?].

[what is considered to be the best method?]

[are there any particularly good or bad examples of evaluation? Any cases? Perhaps Neil Woodford's funds as a cautionary tale?]

It would appear that the above methods are good for evaluating portfolio performance, but not for ensuring adherence to the investment policy statement. It is therefore recommended that an additional review of holdings is performed to maintain this alignment.

Investment asset allocation is difficult. Decisions about where, how and how much to invest must be data-driven, analysed and justified. Furthermore, the decisions must be challenged to ensure that they fit within the investor portfolio aims and risk tolerance. Proper use of the aforementioned methods helps to increase the chance of successful outcomes when investing.