INTRODUCTION

Investment and Portfolio

Management
Introduction to Investment
Definition of Terms
Investment Management refers to the professional
handling of various securities (such as stocks,
bonds, and other financial assets) and other
assets (like real estate) to meet specified
investment goals for the benefit of investors.
These investors can be individuals or institutions
like corporations, pension funds, or insurance
companies.
 The primary responsibilities of investment
management include:

1. Portfolio Management 3. Security Selection

Selecting the right mix of assets to Choosing specific securities within
meet the investment objectives of the each asset class to invest in, based
client balancing risk and return. on research and analysis.
2. Asset Allocation
4. Risk Management
Deciding how to distribute investment
fund across different asset classes Identifying, analyzing, and
(equities, real estate, fixed income) managing the risks associated with
different investments.
to maximize return while minimizing
risk.
 The primary responsibilities of investment
management include:

5. Performance Measurement 6. Financial Planning and

Advisory Services
Monitoring and assessing the Providing advice on how to
achieve long-term financial goals
performance of the investments to through investment strategies.
ensure they are meeting the goals
and making adjustments as
Overall, investment management
needed. involves a combination of
strategies and tactics aimed at
maximizing an investor's wealth
while managing risk according to
their financial objectives.
Definition of Investment
Investment refers to the allocation of money or
capital to an asset, project, or enterprise with the
expectation of generating income, profit, or an
increase in value over time. The core idea of
investment is to put resources into something
today with the goal of receiving a greater return in
the future.
Key Aspects of Investment:
1. Capital Allocation - investment involves committing money or
resources to an asset, business, or venture.
2. Expectation of Return - the primary objective of investing is to
generate a return, which could be in the form of income (like interest
or dividends), capital appreciation (an increase in the value of the
asset), or both.
3. Risk and Reward - all investments carry some level of risk, meaning
there is a possibility that the return might not be as expected, or that
the invested capital might be lost.
4. Time Horizon - investments are typically made with a long-term
perspective, although some may have short-term objectives. The time
horizon can impact the level of risk and the expected return.
Investment vs. Speculation
Investment Speculation

Purpose To generate income or profit over a To make a quick profit in a short

long period of time period
Risk Less risky More risky
Time Frame Long Term Short Term
Analysis Thorough analysis of financial Relies on rumors and trends
statements and other data

Liquidity More liquid and can be easily Sometimes can lead to assets
converted to cash that are difficult to sell
 Securities: Equity, Debt, and
Derivatives.

Real Estate: Property ownership

Types of or development.

Investments Businesses: Starting or buying a

business.

Commodities: Gold, oil, and other

physical goods.
The Investment Process
The Investment Process
Definition of Terms
Financial Institution is an organization that provides financial services to
individuals, businesses, and governments. These services typically include
managing deposits, providing loans, facilitating investments, offering payment
services, and other financial transactions. Financial institutions play a crucial
role in the economy by acting as intermediaries between savers and borrowers.
Financial markets are platforms or systems where individuals, companies, and
governments buy and sell financial assets such as stocks, bonds, currencies,
and derivatives. These markets facilitate the transfer of funds from savers
(investors) to borrowers (individuals, businesses, and governments) and are
essential for allocating capital in the economy.
Private placement is a method of raising capital where securities (such as stocks
or bonds) are sold directly to a small group of select investors rather than being
offered to the public on the open market. These investors are typically
institutional investors (such as banks, mutual funds, insurance companies, or
pension funds) or high-net-worth individuals.
Suppliers and Demanders of Funds
1. Government
- Investment for long-term project of public facilities
- Typically net demanders of funds
2. Businesses
- Investment in production of goods and services
- Typically net demanders of funds
3. Individuals
- Some need for loans (houses, cars)
- Typically net suppliers of funds
Types of Investors
1. Individual Investors
• Retail Investors: Individuals who buy and sell
securities for their personal account, not for
another company or organization.
• Angel Investors: Wealthy individuals who provide
capital for start ups, often in exchange for equity or
convertible debt.
Types of Investors
2. Institutional Investors
• Pension Funds: Organizations that manage retirement funds on
behalf of employees, investing in various securities to ensure long-
term returns.
• Mutual Funds: Pooled funds managed by professional money
managers, investing in diversified portfolios of stocks, bonds, and
other securities.
• Hedge Funds: Private investment funds that engage in a wide range
of strategies, often including leverage, to achieve high returns for
their investors.
• Insurance Companies: Invest in a variety of assets to ensure they can
cover future policyholder liabilities.
• Endowment Funds: Funds owned by institutions like universities,
used to generate income through investments to support their
activities.
Steps in Investing
Step 1: Meeting Investment Prerequisite
• Adequately provide for necessities of life
• Accessible funds for meeting emergency cash needs
• Adequate protection against common risks
Step 2: Establishing Investment Goals
• Accumulating retirement funds
• Enhancing current income
• Saving for major expenditures
• Sheltering income from taxes
Steps in Investing
Step 3: Adopting an Investment Plan
• Develop an investment plan
• For each goal specify the target date and tolerable risk
Step 4: Evaluating Individual Vehicles
• Assess potential return and risk
Step 5: Selecting Suitable Investments
• Research and gather information on specific
investments
• Make investment selection
Steps in Investing
Step 6: Constructing a Diversified Portfolio
• Assemble an investment portfolio of suitable
investments
• Diversification can increase returns or decrease risks

Step 7: Managing the Portfolio

• Compare actual performance with expected
performance
• Take corrective action needed
Investing Decisions
• Types of Income for Individuals
Active Income – income from working (wages, salaries,
pensions)
Portfolio Income – income from investments (interest,
dividends, capital gains)
Passive Income – income from special investments
(rents from real estate, royalties, limited
partnerships)
Investing Decisions Over Investor Life Cycle
 Investors tend to follow different investment philosophies
as they move through different stages of the life cycle
 Youth Stage
• Age 20 to 40
• Growth oriented investments
• Stress capital gains over current income
• Higher potential growth, higher potential risk
 Some examples of investments for youth stage:
• Common stocks, options or futures
Investing Decisions Over Investor Life Cycle
Middle Aged Consolidation Stage
• Age 40 -60
• Family demands and responsibilities become more
important (educational expenses, retirement savings).
• Move toward less risky investments to preserve capital.
• Transition to higher quality securities with lower risk.
Some examples of investments for middle age stage:
• Low risk growth income stocks, preferred stocks,
convertible stocks, high grade bonds and mutual funds
Investing Decisions Over Investor Life Cycle

 Retirement Stage
• Age 60 and older
• Preservation of Capital and current income become the
primary goal
• Current income needed to supplement retirement income
• Highly conservative investment portfolio
 Some examples of investments for middle age stage:
• Low risk income stocks and mutual funds, quality
corporate bonds, government bonds, bank certificate of
deposits
The Role of Short Term Investments
• Liquidity is the ability of the investment to be
converted into cash quickly and with little or no
loss in value.
• Primary use is for emergency cash reserves or
to save for a specific short term financial goal.
• Advantages: High liquidity, low risk of default
• Disadvantages: Low levels of return, loss of
potential purchasing power from inflation
Investment Suitability
Short term investments are used for:
Savings
• Emphasis on safety, liquidity and convenience
instead of high yield
Investment
• Stable return is important
• Used as a component of diversified portfolio
• Used as a temporary outlet while waiting for long term
attractive investments
Investments and the Business Cycle
The business cycle refers to the recurring sequence of growth and
decline, boom and recession that characterizes the economy.
Conditions of the economy:
1. Recovery, Growth or Expansion
This is a phase where the economy is growing. Indicators such
as GDP, employment, production, and consumer spending are
increasing. Businesses are generally profitable, and investments
are rising. Expansion is usually associated with a healthy economic
environment where demand for goods and services is high, leading
to higher production and income levels.
Investments and the Business Cycle
Conditions of the economy:
2. Peak or Boom
The peak represents the height of economic activity. At this
stage, the economy operates at full capacity, with low
unemployment, high consumer confidence, and robust business
performance. However, inflation may also reach higher levels due
to increased demand.
BusinessCompanies often enjoy maximum profitability
during this phase, but rising costs and potential inflationary
pressures may start to squeeze profit margins. Businesses might
face challenges in maintaining growth as the economy approaches
its capacity limits.
Investments and the Business Cycle
Conditions of the economy:
3. Recession (Contraction):
A recession occurs when the economy shrinks or
contracts. This is characterized by a decline in economic
activity, falling GDP, reduced consumer spending, higher
unemployment, and decreased industrial production. A
recession can be triggered by various factors, such as a
decrease in demand, financial crises, or external shocks. If
prolonged, it can lead to a depression.
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