Posts Tagged ‘assets’

There    are    many    types    of    regulatory    constraints. These involve constraints on the asset classes that are permissible and concentration limits on investments. Moreover, in making the asset allcation decision, consideration must be given to any risk-based capital requirements. For depository institutions and insurance companies, the amount of statutory capital required is related to the quality of the assets in which the institution has invested. There are two types of risk- based capital requirements: credit risk-based capital requirements and interest rate-risk based capital requirements. The former relates statutory capital requirements to the credit-risk associated with the assets in the portfolio. The greater the credit risk, the greater the statutory capital required. Interest rate-risk based capital requirements relate the statutory capital to how sensitive the asset or portfolio is to changes in interest rates. The greater the sensitivity, the higher the statutory capital required.

There are some institutional investors that make the asset allocation decision based purely on their understanding of the risk-return characteristics of the various asset classes and expected returns. The asset allocation will take into consideration any investment constraints or restrictions. Asset allocation models are commercially available for assisting those individuals responsible for making this decision.
In the development of an investment policy, the following factors must be considered:
Client constraints   Regulatory constraints   Tax and accounting issues