CHAPTER
TWENTY-THREE
INVESTMENT
MANAGEMENT
INVESTMENT MANAGEMENT
TRADITIONAL INVESTMENT MANAGEMNT ORGANIZATIONS
•
Security Analysts play a key role and rely upon information and reports from
economists
technicians
market expert•
Investment Committee is advised by the analyst toINVESTMENT MANAGEMENT
I N V E S T M E N T M A N A G E M E N T C O M P A N I E S
E C O N O M I S T S T E C H N I C I A N S M A R K E T E X P E R T S S E C U R I T Y A N A L Y S T
I N V E S T M E N T C O M M I T T E E A P P R O V E D L I S T O F S E C U R I T I E S
INVESTMENT
MANAGEMENT FUNCTIONS
FIVE STEP PROCEDURE:
• SETTING INVESTMENT POLICY
• PERFORMING SECURITY ANALYSIS
• CONSTRUCTING A PORTFOLIO
• REVISING THE PORTFOLIO
• EVALUATING THE PORTFOLIO
INVESTMENT
MANAGEMENT FUNCTIONS
SETTING INVESTMENT POLICY
• DETERMINE THE INVESTMENT OBJECTIVE
estimate the client’s level of risk toleranceINVESTMENT
MANAGEMENT FUNCTIONS
PERFORMING SECURITY ANALYSIS
• Security Selection: A 2 Stage Procedure
• STAGE I: forecast
expected returns
standard deviation
covariances
identify optimal portfolioINVESTMENT
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
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 costsREVISING THE PORTFOLIO
REVISING THE PORTFOLIO
• SWAP METHODOLOGY
a cost saving method which involvesexchanges of asset rather than purchases or sales
TYPES OF SWAPS:– Equity
– Interest Rate
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
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
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
