Ch 6 investors and the investment process The

Ch 6 : investors and the investment process The CFA institute divides the process of investment management into three main elements that constitute a dynamic feedback loop. Planning , Execution and feedback. 1 prepared By : Ghazi Mamandi 2/13/2022

Components of investment management process 1 - planning A- Identifying and specifying the investors objectives and constrains. B- creating investment policy statement. C- forming capital market expectation 2 - Execution : portfolio construction and revision Aasset allocation B- security selection C- implementation and execution. 2 prepared By : Ghazi Mamandi 2/13/2022

Components of investment management process 3 - Feedback A- monitoring ( investor, economic, and market input factor ) B- Rebalancing C- performance evaluation. 3 prepared By : Ghazi Mamandi 2/13/2022

Determination of portfolio policies Objectives Constraints Return requirement liquidity Risk tolerance Horizon ( probability ) Regulations Taxes Unique needs Age , wealth 4 prepared By : Ghazi Mamandi 2/13/2022

Investors objectives Individual investors The first significant investment decision for most individuals concern education, which is an investment in human capital. The major asset most people have during their early working years is the earning power derived from their skills. 5 prepared By : Ghazi Mamandi 2/13/2022

Professional investors provide investment management services for a fee. Some are employed directly by wealthy individual investors. 6 prepared By : Ghazi Mamandi 2/13/2022

Personal trusts A personal trust is established when an individual confers legal title to property to another person or institution, who then manages that property for one or more investors. The holder of the title is called the trustee. The trustee is usually a bank , a lawyer or an investment professional. 7 prepared By : Ghazi Mamandi 2/13/2022

Mutual funds are firms that manage pools of individual investor money. They invest in coordinate with their objective and issue shares that entitle investors to get income by the fund. The return requirement and risk tolerance for mutual funds are highly variable because funds segment( division ) the investors market. 8 prepared By : Ghazi Mamandi 2/13/2022

Pension funds There are two basic type of pension plans. • Defined contribution and defined benefit. Defined contribution plans are in effect saving account established by the firm for its employees. The employer contributes funds to the plan , but the employee bears all the risk of the funds investment performance. These plans are called defined contribution because the firm only obligation is to make the stipulated contribution to the employees retirement account. 9 prepared By : Ghazi Mamandi 2/13/2022

Life insurance companies generally invest so as to hedge their liabilities , which are defined by the policy they write. The company can reduce its risk by investing in assets that will return more in the event the insurance policy coverage become more expensive. 10 prepared By : Ghazi Mamandi 2/13/2022

Banks can earn profit from the interest spread between loans extended ( the bank assets ) and deposits and CD( the bank liabilities ) as well as from fees for services. Banks can invest there fund surplus in Treasury bill , bonds. Banks can provide financial services to its customers by selecting securities in the stock markets. Banks can receive fees for providing consult services. 11 prepared By : Ghazi Mamandi 2/13/2022

Investment polices Active versus passive policies Passive management styles can be applied to both the security selection and the asset allocation decisions. With regards to asset allocation. Passive management simply means that the manager does not depart from or her normal asset- class weighting in response to changing expectation about the performance of different market. 12 prepared By : Ghazi Mamandi 2/13/2022

Monitoring and revising investment portfolio Choosing the investment portfolio requires the investors to set objectives. Acknowledges constrain , determine asset –class proportions and performance security analysis. The objectives change over time, therefore , the investment process requires that we continually monitor and update our portfolios. 13 prepared By : Ghazi Mamandi 2/13/2022

14 prepared By : Ghazi Mamandi 2/13/2022