A company created the following investment policy guidelines to manage its short

Question

A company created the following investment policy guidelines to manage its short term portfolio. Review the statement and comment on any deficiencies. Short-term Portfolio Investment Policy Guidelines 1. The Accounting and Finance Department will implement these guidelines and manage Jackpot Corporation?s short-term portfolio of investment assets. 2. The firm will invest excess cash balances in the short-term portfolio. The amount invested will be determined by a forecast of cash needs (deficits and surpluses) taking into account projected cash inflows and outflows. That forecast will be updated daily. 3. The Lehman Brothers Aggregate Bond Index will be used as the benchmark for monthly portfolio evaluation. 4. Portfolio securities will have a maximum maturity of three months. Derivative securities are prohibited.

Explanation / Answer

The deficiencies in the investment policy guidelines include: ? Guideline 1 should name specific individuals who are responsible for the management of the portfolio, accountable for the portfolio?s performance, and charged with implementation of the guidelines. Naming a department rather than individuals allows those responsible for the portfolio to evade the consequences of bad decisions or poor management. ? Guidelines 2 is too general. The statement of the purpose of the portfolio should specify the investment strategy to be used. Moreover, it needs to state what the portfolio is expected to achieve. ? Guidelines 3 should indicate a benchmark appropriate for a short-tern portfolio, such as the yield on US Treasury bills. The Lehman Brothers Aggregate Bond Index is too broad to serve as a benchmark for a portfolio of short-term securities. The guidelines should also specify acceptable parameters within which the portfolio?s return should comply. Guidelines 4 needs to elaborate on the securities that are and are not allowed beyond stating the permitted maturities.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.