CHAPTER SEVENTEEN INVESTMENT MANAGEMENT 1 INVESTMENT MANAGEMENT TRADITIONAL

CHAPTER SEVENTEEN INVESTMENT MANAGEMENT 1

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 2

INVESTMENT MANAGEMENT 3

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

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

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

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 7

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 8

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 9

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 10

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 11

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 12