Question: 1
Topic: Portfolio Management – Individual
Minutes: 36

Reading References:
15. “Managing Individual Investor Portfolios,” Ch. 2 Managing Investment
Portfolios: A Dynamic Process, 3rd
edition, James W. Bronson, Matthew H.
Scanlan, and Jan R. Squires (CFA Institute, 2007)
20. “Goals-Based Investing: Integrating Traditional and Behavioral Finance,” Daniel
Nevins, Journal of Wealth Management (Institutional Investors, 2004)

Test individual portfolio management concepts.

LOS: 2008-III-4-15-j, k, l, n
15. “Managing Individual Investor Portfolios”
The candidate should be able to:
j) explain how to set risk and return objectives for individual investor
portfolios and discuss the impact that ability and willingness to take risk
have on risk tolerance;
k) identify and explain each of the major constraint categories included in an
individual investor’s investment policy statement;
l) formulate and justify an investment policy statement for an individual
n) compare and contrast traditional deterministic versus Monte Carlo
approaches to retirement planning and explain the advantages of a Monte
Carlo approach.

LOS: 2008-III-4-20-c, d
20. “Goals-Based Investing: Integrating Traditional and Behavioral Finance”
c) justify the use of absolute performance and cash flow matching objectives
to meet the goal of lifestyle protection;
d) compare lifestyle protection strategies with fixed horizon strategies and
explain when the use of each approach is appropriate.
The revised return objective for the Carvalhos’ portfolio is to:
– provide for the mortgage on their home
– support their living expenses in retirement
– support charitable endeavors in retirement
– provide a bequest for their children.

The after-tax nominal rate of return is 8.48%. The return is calculated using the following

Mortgage payments remaining 5
Annual mortgage amount $35,000
Investment portfolio value (current) $10,200,000
Investment portfolio value (target) $15,000,000

Using the HP12-C calculator, the following figures are used in the calculation when
solving for i:

N = 5, PV = 10,200,000, PMT = -55,000, FV = -15,000,000, compute i = 8.48%
N = 5, PV = -10,200,000, PMT = 55,000, FV = 15,000,000, compute i = 8.48%

Note: Salaries/expenses are a wash.

Reading References:
7. “Heuristic-Driven Bias: The First Theme,” Ch. 2, Beyond Greed and Fear: Understanding
Behavioral Finance and the Psychology of Investing, Hersh Shefrin (Oxford University
School Press, 2002)
8. “Frame Dependence: The Second Theme,” Ch. 3, Beyond Greed and Fear: Understanding
Behavioral Finance and the Psychology of Investing, Hersh Shefrin (Oxford University
School Press, 2002)
11. “Investment Decision Making in Defined Contribution Pension Plans,” Pensions, Alistair
Byrne, (Palgrave McMillan 2004)
13. “A Survey of Behavioral Finance,” Ch. 18, Handbook of the Economics of Finance Nicholas
Barberis and Richard Thaler (Elsevier Science B.V., 2003)
Test behavioral finance concepts for individual