Some of following questions may have been discussed before, but I am still confused. 1. Why “lifestyle protection strategies” are constructed with “a beta of less than ONE” ? Is this a HIGHLY CONSEVATIVE strategy ? Please refer to the 4th paragraph on P.303, CFAI text Vol 2. 2. In 4th paragraph on P.306, it is stated that is a HIGHLY CONSEVATIVE. Both “lifestyle protection strategies” & “fixed horizon strategy” are HIGHLY CONSEVATIVE comparing with “traditional investment methods” ? 3. Does “traditional investment methods” mean mean-variance risk/return methods ? Please refer to the 1st paragraph on P.307 in the “CONCLUSIONS”. 4. Mainly, are there are 4 strategies mentioend in this reading ? i.e., A. traditional investment methods B. lifestyle protection strategy C. cash flow matching D. fixed horizon strategy
AMA Wrote: ------------------------------------------------------- > Some of following questions may have been > discussed before, but I am still confused. > > 1. Why “lifestyle protection strategies” are > constructed with “a beta of less than ONE” ? Is > this a HIGHLY CONSEVATIVE strategy ? Please refer > to the 4th paragraph on P.303, CFAI text Vol 2. > > 2. In 4th paragraph on P.306, it is stated that is > a HIGHLY CONSEVATIVE. Both “lifestyle protection > strategies” & “fixed horizon strategy” are HIGHLY > CONSEVATIVE comparing with “traditional investment > methods” ? > > 3. Does “traditional investment methods” mean > mean-variance risk/return methods ? Please refer > to the 1st paragraph on P.307 in the > “CONCLUSIONS”. > > 4. Mainly, are there are 4 strategies mentioend in > this reading ? i.e., > A. traditional investment methods > B. lifestyle protection strategy > C. cash flow matching > D. fixed horizon strategy Traditional investment methods calls for achieving the highest return for a given level of risk or lowest risk for a given level of return. It does not matter what type of investments you are going for, any minimum amount you maintain (in cash or other instruments) also do not matter. 1. Compared to traditional investments yes, it would be considered a conservation strategy. However I would not term it as “high conservation” if beta is less than 1. 2. However you see that in this case, CFA book is referring to a exhibit where most of the investment is in zero coupon bond. In this case, yes it would be highly conservative. 3. Yes
From my point of view, traditional investment method is taking a whole portfolio approach. On the other hand, non-traditional or goal-based investing lets you rationalize using mental-accounts. This asset is for that goal, the other asset is for the other and so on…
Why “lifestyle protection strategies” are constructed with “a beta of less than ONE” ? Any rationale behind this ?
A beta of 1 corresponds to taking same exposure to systematic risk as the stock market in general. Hence, to “protect” your lifestyle, you should take a more fixed income-like approach for that portion of your portfolio. That’s my understanding from it.
revisor Wrote: ------------------------------------------------------- > A beta of 1 corresponds to taking same exposure to > systematic risk as the stock market in general. > Hence, to “protect” your lifestyle, you should > take a more fixed income-like approach for that > portion of your portfolio. That’s my understanding > from it. Agree !