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CHAPTER SEVENTEEN

CHAPTER SEVENTEEN. INVESTMENT MANAGEMENT. INVESTMENT MANAGEMENT. TRADITIONAL INVESTMENT MANAGEMNT ORGANIZATIONS Security Analysts play a key role and rely upon information and reports from economists technicians market experts Investment Committee is advised by the analyst to create

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CHAPTER SEVENTEEN

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  1. CHAPTER SEVENTEEN INVESTMENT MANAGEMENT

  2. INVESTMENT MANAGEMENT • TRADITIONAL INVESTMENT MANAGEMNT ORGANIZATIONS • Security Analysts play a key role and rely upon information and reports from • economists • technicians • market experts • Investment Committee is advised by the analyst to create • An Approved List of Securities

  3. INVESTMENT MANAGEMENT

  4. INVESTMENT MANAGEMENT FUNCTIONS • FIVE STEP PROCEDURE: • SETTING INVESTMENT POLICY • PERFORMING SECURITY ANALYSIS • CONSTRUCTING A PORTFOLIO • REVISING THE PORTFOLIO • EVALUATING THE PORTFOLIO

  5. INVESTMENT MANAGEMENT FUNCTIONS • SETTING INVESTMENT POLICY • DETERMINE THE INVESTMENT OBJECTIVE • estimate the client’s level of risk tolerance

  6. INVESTMENT MANAGEMENT FUNCTIONS • PERFORMING SECURITY ANALYSIS • Security Selection: A 2 Stage Procedure • STAGE I: forecast • expected returns • standard deviation • covariances • identify optimal portfolio

  7. INVESTMENT MANAGEMENT FUNCTIONS • PERFORMING SECURITY ANALYSIS • Security Selection: A 2 Stage Procedure • STAGE II: Asset Allocation • strategic • refers to how a portfolio’s funds would be divided, given the manager’s long-term forecasts from Stage I • tactical • given short-term forecasts, who will assets be allocated at any one time

  8. REVISING THE PORTFOLIO • REVISING THE PORTFOLIO • Use Cost-Benefit Analysis • transaction costs should be examined since they complicate the management decision • portfolio revisions must be weighed against the cost of revision particularly with regard to transaction costs

  9. REVISING THE PORTFOLIO • REVISING THE PORTFOLIO • SWAP METHODOLOGY • a cost saving method which involves exchanges of assets rather than purchases or sales • TYPES OF SWAPS: • Equity • Interest Rate

  10. REVISING THE PORTFOLIO • REVISING THE PORTFOLIO • SWAP METHODOLOGY • The Equity Swap: • The Agreement • one party agrees to pay the other a variable-sized cash payment • the other party agrees to a fixed-sized cash payment • Results in a restructured portfolio without incurring any transaction costs

  11. REVISING THE PORTFOLIO • REVISING THE PORTFOLIO • SWAP METHODOLOGY • The Interest Rate Swap • The Agreement • one party pays the second a variable-sized stream of cash based on the current level of an agreed-upon interest rate (e.g. LIBOR) • second party pays the first a fixed-sized payment stream based on the interest rate at the time of the Agreement • Results in a restructured portfolio without incurring any transaction costs

  12. THE MARKET FOR SWAPS • THE MARKET FOR SWAPS • The Market • Is unregulated for the most part • no government agency responsible for it • privacy • each party must pay close attention to the solvency of the other party • Swap Banks are the heart of the market • they act as dealers • arrange for creation and dissolution of agreements

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