INVESTMENT PORTFOLIO MANAGEMENT Lecture 1 General review of

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INVESTMENT & PORTFOLIO MANAGEMENT Lecture 1: General review of the portfolio and investment and

INVESTMENT & PORTFOLIO MANAGEMENT Lecture 1: General review of the portfolio and investment and its essential definitions Lecturer: Hazhar Khalid Ail 1

What is 'Portfolio Management ■ Portfolio management is the art and science of making

What is 'Portfolio Management ■ Portfolio management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. ■ Portfolio management is all about determining strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, to maximize return at a given appetite for risk.

General review of the portfolio ■ Investment decisions are about making choices: Ø Will

General review of the portfolio ■ Investment decisions are about making choices: Ø Will income be spend or saving ? If you chose to save, you face second decision ( what should be done with the saving? ) ■ Portfolio decisions are obviously important. It set a general framework for the asset allocation of the portfolio among various type of investment such as ( stocks, bonds, derivatives, bank deposit etc. . ) Factors affect the construction of a portfolio Investor Goals Risks Governme nt regulation( e. g. , Taxes, tariffs) Knowledge of investment alternative s 3

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Investment: investment may be defined as “a commitment of funds made in the expectation

Investment: investment may be defined as “a commitment of funds made in the expectation of some positive rate of return”. investment risk : Is a possibility of variation in the actual return, it realized when that the actual return is lower than the return expected to be realized. Investment Return Risk 5

Types of Investment: 1. Bank loans ■ 2. 3. Bonds ■ A form of

Types of Investment: 1. Bank loans ■ 2. 3. Bonds ■ A form of a loan issued by a corporation or government. ■ Can be bought and sold in financial markets. Home mortgages ■ ■ 4. Borrower obtains resources from a lender to be repaid in the future. Home buyers usually need to borrow using the home as collateral for the loan. A specific asset the borrower pledges to protect the lender’s interests. Stocks ■ ■ ■ The holder owns a small piece of the firm and entitled to part of its profits. Firms sell stocks to raise money. Primarily used as a stores of wealth. 6

5. Asset-backed securities ■ Shares in the returns or payments arising from specific assets,

5. Asset-backed securities ■ Shares in the returns or payments arising from specific assets, such as home mortgages and student loans. ■ Mortgage backed securities bundle a large number of mortgages together into a pool in which shares are sold. ■ Securities backed by sub-prime mortgages played an important role in the financial crisis of 2007 -2009. 6. Mutual Funds: ■ is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests money in stocks, bonds and other securities. their 7. Real Estate: ■ is the property, land, buildings, air rights above the land underground rights below the land. The term real estate means real, or physical, property. 7

Essential definitions: a) A primary market is one in which a borrower obtains funds

Essential definitions: a) A primary market is one in which a borrower obtains funds from a lender by selling newly issued securities. ■ Occurs out of the public views. ■ An investment bank determines the price, purchases the securities, and resells to clients. ■ This is called underwriting and is usually very profitable. b) Secondary markets are those where people can buy and sell existing securities. ■ Buying a share of IBM stock is not purchased from the company, but from another investor in a secondary market. ■ These are the prices we hear about in the news. c) return: the sum of income plus capital gain earned on an investment d) Rate of return: The annual percentage return realized on an investment e) Risk: The possibility of loss; the uncertainty of future returns. 8

f) value: the present value of future benefits g) Income: the flow of money

f) value: the present value of future benefits g) Income: the flow of money or its equivalent produced by an asset , dividend and interest h) Capital gain: an increase in the value of a capital asset, such as stock. i) Speculation: an investment that offers a potentially large return but is also very risky. ( a reasonable probability that the investment will produce a loss) j) Marketability: the ease with which as assets may be bought and sold k) Liquidity: moneyness; the ease with which assets can converted into cash. 9

Diversification and Asset Allocation Asset allocation involves dividing an investment portfolio among different asset

Diversification and Asset Allocation Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one. Diversification is all about asset class (Allocation) 10

Diversification and Asset Allocation ■ Why Asset Allocation Is So Important? a) By including

Diversification and Asset Allocation ■ Why Asset Allocation Is So Important? a) By including asset categories with investment returns that move up and down under different market conditions within a portfolio, an investor can protect against significant losses. b) Historically, the returns of the three major asset categories have not moved up and down at the same time. c) Market conditions that cause one asset category to do well often cause another asset category to have average or poor returns. d) By investing in more than one asset category, you'll reduce the risk e) If one asset category's investment return falls, you'll be in a position to counteract your losses in that asset category with better investment returns in another asset category. 11

The importance of Diversification ■ To reduce risk ■ To shift and share risks

The importance of Diversification ■ To reduce risk ■ To shift and share risks between assets ( projects) ■ By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain. ■ To meet the financial goals and having better portfolio 12