CHAPTER TWENTYTHREE INVESTMENT MANAGEMENT INVESTMENT MANAGEMENT n TRADITIONAL

CHAPTER TWENTY-THREE INVESTMENT MANAGEMENT

INVESTMENT MANAGEMENT n TRADITIONAL INVESTMENT MANAGEMNT ORGANIZATIONS • Security Analysts play a key role and rely upon information and reports from 3 economists 3 technicians 3 market expert • Investment Committee is advised by the analyst to create • An Approved List of Securities

INVESTMENT MANAGEMENT

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

INVESTMENT MANAGEMENT FUNCTIONS n SETTING INVESTMENT POLICY • DETERMINE THE INVESTMENT OBJECTIVE 3 estimate the client’s level of risk tolerance

INVESTMENT MANAGEMENT FUNCTIONS n PERFORMING SECURITY ANALYSIS • Security Selection: • STAGE I: forecast A 2 Stage Procedure 3 expected returns 3 standard deviation 3 covariances 3 identify optimal portfolio

INVESTMENT MANAGEMENT FUNCTIONS n PERFORMING SECURITY ANALYSIS • Security Selection: A 2 Stage Procedure • STAGE II: Asset Allocation 3 strategic – refers to how a portfolio’s funds would be divided, given the manager’s long-term forecasts from Stage I 3 tactical – given short-term forecasts, who will assets be allocated at any one time

REVISING THE PORTFOLIO n REVISING THE PORTFOLIO • Use Cost-Benefit Analysis 3 transaction costs should be examined since they complicate the management decision 3 portfolio revisions must be weighed against the cost of revision particularly with regard to transaction costs

REVISING THE PORTFOLIO n REVISING THE PORTFOLIO • SWAP METHODOLOGY 3 a cost saving method which involves exchanges of asset rather than purchases or sales 3 TYPES OF SWAPS: – – Equity Interest Rate

REVISING THE PORTFOLIO n REVISING THE PORTFOLIO • SWAP METHODOLOGY 3 The Equity Swap: – – The Agreement • one party agrees to pay the other a variablesized cash payment • the other party agrees to a fixed-sized cash payment Results in a restructured portfolio without incurring any transaction costs

REVISING THE PORTFOLIO n REVISING THE PORTFOLIO • SWAP METHODOLOGY 3 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 n THE MARKET FOR SWAPS • The Market 3 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 3 Swap Banks are the heart of the market – – they act as dealers arrange for creation and dissolution of agreements

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