Return objective
What a portfolio must achieve, stated so it can be checked — often a real return tied to spending needs, inflation or a liability. It has to be consistent with the client's risk tolerance.
Where you will meet it
Return objective appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Tell apart an investor's return objectives and their tolerance for risk
“A return objective states what the portfolio must achieve, often expressed relative to a spending requirement, an inflation rate or a liability.”
- Explain the risk measures built into equity portfolio construction and how caps on them alter the portfolio
“The trap is setting limits that are inconsistent with the alpha target, so the mandate cannot realistically meet its return objective.”
- Propose an asset allocation suited to what the investor wants to achieve and the limits they face, and defend it
“Eliminate any that breach a constraint, such as insufficient liquidity for planned spending or a shortfall probability above the stated limit; among the survivors choose the one that meets the return objective with the least risk, or the highest risk-adjusted utility.”
- Discuss how private clients differ from institutional ones and draft a suitable investment policy statement for a private client
“An investment policy statement for an individual sets out background and goals, return objective, willingness and ability to take risk, time horizon, liquidity, tax, legal and regulatory constraints, and unique circumstances such as concentrated holdings, then the strategic allocation, rebalancing and review.”
See also
Practise it
Practise return objective until it is automatic: questions that explain every wrong option.
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