Investment Management Unit 1 1. Importance of ethics –  2. Investments strategies 3. Career paths in investment. a. Investment Analyst b. Portfolio Ma

Investment Management Unit 1

1. Importance of ethics – 

2. Investments strategies

3. Career paths in investment.

a. Investment Analyst

b. Portfolio Manager

c. Financial Planner

Unit 3

Common stock valution

Unit 4

4. What are stock market indicators series

a. Priced weighted

b. Value weighted

c. Unweighted

Unit 6

5. What is the impact of a risk-free portfolio correlation

6. How does risk free impact the standard deviation

7. Expected return

8. unSystemic risk – diversation – how to elimate unsystemic risk

9. diagram

unit 7

10. describe an efficient capital market theory

11. why analyst need to focus on mid-tier stocks instead of top tier stocks

12. Why would an investor appreciate the option deverative 

13. Difference between future and forward markets

14. Beta

15. What is common stock valuations Investment


Source Material

 Reilly, F. K. & Brown, K.C. (2003). Investment Analysis, Portfolio

Management. 7th Ed. South Western Publishing

Investment Defined

 Investment is the current commitment of dollars, for a

period, in order to derive future payments that will

compensate the investor for:

 (1) the time the funds are committed

 (2) the expected rate of inflation, and

 (3) the uncertainty of the future payments

 The emphasis of investments is Returns (the reward for

owning an investment)

 Income from investment (such as dividend)

 Increase in value of investment

Investment Defined

 Financial investment is not to be confused

with investment in economics.

To the economist, investment is the net

addition made to the nation’s capital stock

that consists of goods and services that are

used in the production process.

The Investment Process

Types of Investors

 An “investor” can be an individual, a government, a pension fund, or a


 This definition includes all types of investments, including investments by

corporations in plant and equipment, and investments by individuals in stocks,

bonds, commodities, or real estate (Reilly, 2006, p.15).

 Individual investors are large in number but their investable resources are

comparatively smaller.

 They generally lack the skill to carry out extensive evaluation and analysis

before investing. Moreover, they do not have the time and resources to

engage in such an analysis.

 Institutional investors are fewer, such as mutual funds, investment
companies, banking and non-banking companies, insurance

corporations, etc. with large amounts of surplus funds.

 They engage professional fund managers to carry out extensive analysis and

evaluation of different investment opportunities.

Why Invest?

 Income streams and spending needs do not coincide.

 If income is greater than spending – people tend to invest the


 If spending is greater than income – people tend to borrow to

cover the deficit.

 Therefore, people would be willing to forgo current

consumption only if they can achieve greater
consumption in the future.

 The rate of exchange between future consumption and

present consumption is the pure rate of interest.

 Market forces determine this rate.

Objectives of an Investor

 The objectives of an investor can be stated as:

 Maximization of return

 Minimization of risk

 Hedging against inflation

 Investors, in general, desire to earn as large returns as possible with the minimum

of risk.

 Risk is the probability that actual returns realized from an investment may be different
from the expected return. If we consider the financial assets available for investment,
we can classify them into different risk categories.

 Government securities would constitute the low risk category as they are practically risk free.

 Debentures and preference shares of companies may be classified as medium risk assets.

 Equity shares of companies would form the high risk category of financial assets.

 An investor would be prepared to assume higher risk only if he expects to get

proportionately higher returns. Thus, there is a trade-off between risk and return.

Characteristics of Investments


 All investments are characterized by the
expectation of a return and are engaged
with that being the primary objective.

 The return may be received in the form of
yield plus capital appreciation (gain).

 The difference between the sale price and
the purchase price is capital appreciation.

 The dividend or interest received from the
investment is the yield.

 Different types of investments promise
different rates of return.

 The return from an investment depends
upon the nature of the investment, the
maturity period, among other factors.


 Risk is inherent in any investment.

 This risk may relate to loss of capital, delay in
repayment of capital, non-payment of interest,
or variability of returns.

 While some investments like government
securities and bank deposits are almost riskless,
others are more risky. The risk of an investment
depends on the following factors.

 The longer the maturity period, the larger is the

 The lower the credit worthiness of the borrower,
the higher is the risk.

 The risk varies with the nature of investment.

 Investments in ownership securities like equity
shares carry higher risk compared to investments
in debt instruments like debentures and bonds.

Risk and return of an investment are related. Normally, the higher the risk, the higher is the return.

Characteristics of Investments


 The safety of on investment implies the

certainty of return of capital without

loss of money or time.

 Every investor expects to get back his

capital on maturity without loss and

without delay.


 An investment which is easily saleable or

marketable without loss of money and

without loss of time is said to possess


 Some investment instruments like

preference shares and debentures are

marketable, but there are no buyers in

many cases and hence their liquidity is


 Equity shares of companies listed on

stock exchanges are easily marketable

through the stock exchanges.

An investor generally prefers liquidity for his investments, safety of his funds, a good return

with minimum risk or minimization of risk and maximization of return.

Types of Investments

 Securities or Property
Securities: stocks, bonds, options
Real Property: land, buildings
Tangible Personal Property: gold, artwork,

antiques, collectables

 Direct or Indirect
Direct: investor directly owns a claim on a

security or property
Indirect: investor owns an interest in a

professionally managed collection of securities
or properties

Types of Investments


 These are fixed-income securities commonly
referring to any securities that are founded
on debt.

 When you purchase a bond, you are lending

out your money to a company or government.

In return, they agree to give you interest on

your money and eventually the principal.

 The main attraction of bonds is their relative

 Government bonds are stable; your

investment is virtually guaranteed, or risk-free.

 The safety and stability, however, come at a

cost – with little risk, there is little potential

return. As a result, the rate of return on bonds is

generally lower than other securities.

 Stocks, or equities purchase comes with

part owner of a business, voting rights at
shareholders’ meeting and allows you to
receive any profits (dividends), that the
company allocates to its owners.

 Stocks are volatile. That is, they fluctuate
in value on a daily basis.

 Stocks don’t guarantee any returns –
many don’t even pay dividends, in which
case, the only way that you can make
money is if the stock increases in value –
which might not happen.

 Compared to bonds however, stocks
provide relatively high potential returns.

Types of Investments

Mutual Funds

 A mutual fund is a collection of stocks
and bonds.

 When you buy a mutual fund, you are
pooling your money with a number of
other investors, which enables you (as
part of a group) to pay a professional
manager to select specific securities for

 Mutual funds are all set up with a specific
strategy in mind, and their distinct focus
can be nearly anything: large stocks,
small stocks, bonds from governments,
bonds from companies, stocks and
bonds, stocks in certain industries, stocks
in certain countries, etc.

Deposits/Fixed Term Deposits
 This type of investment is used by a large

proportion of the population e.g. bank

 The appeal is easy access and the very
unlikely event of losing your capital.

 Unfortunately, very little income or
capital growth takes place simply
because of the low interest rates.

 Another important point to bear in mind
is the devaluation of your particular
currency which will eat away at any
gains made especially if cash is held on
deposit in the long-term. For this reason
alone, it is not good practice to leave
large deposits in this type of investment.

Alternative Investments Types

 This is an investment that is not one of the three traditional asset types (stocks, bonds
and cash).

 Most alternative investment assets are held by institutional investors or accredited, high-net-
worth individuals because of their complex nature, limited regulations and relative lack of

 Alternative investments include:

 hedge funds

 managed futures

 real estate – Property investment offers value to investors in two ways:

 (1) Properties increase in capital value over time as house and land prices rise; and (2)You earn rental
income from your tenants.

 commodities

 derivatives contracts -A security whose price is dependent upon or derived from one or more
underlying assets. The derivative itself is merely a contract between two or more parties. Its
value is determined by fluctuations in the underlying asset. The most common underlying
assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most
derivatives are characterized by high leverage.

 A financial derivative that represents

a contract sold by one party (option

writer) to another party (option


 The contract offers the buyer the

right, but not the obligation, to buy

(call) or sell (put) a security or other

financial asset at an agreed- upon

price (the strike price) during a

certain period of time or on a

specific date (exercise date).

 Call options give the option to buy
at certain price, so the buyer would

want the stock to go up.

 Put options give the option to sell at

a certain price, so the buyer would

want the stock to go down.

Say, for example, that you discover a house that you’d love to purchase.

Unfortunately, you won’t have the cash to buy it for another three months. You talk

to the owner and negotiate a deal that gives you an option to buy the house in

three months for a price of $200,000. The owner agrees, but for this option, you pay a

price of $3,000.

Now, consider two theoretical situations that might arise:

 It’s discovered that the house is actually the true birthplace of Elvis! As a result,

the market value of the house skyrockets to $1 million. Because the owner sold

you the option, he is obligated to sell you the house for $200,000. In the end, you

stand to make a profit of $797,000 ($1 million – $200,000 – $3,000).

 While touring the house, you discover not only that the walls are chock-full of

asbestos, but also that the ghost of Henry VII haunts the master bedroom;

furthermore, a family of super-intelligent rats have built a fortress in the

basement. Though you originally thought you had found the house of your

dreams, you now consider it worthless. On the upside, because you bought an

option, you are under no obligation to go through with the sale. Of course, you

still lose the $3,000 price of the option.

This example demonstrates two very important points. First, when you buy an option,

you have a right but not an obligation to do something. You can always let the

expiration date go by, at which point the option becomes worthless. If this happens,

you lose 100% of your investment, which is the money you used to pay for the option.

Second, an option is merely a contract that deals with an underlying asset. For this

reason, options are called derivatives, which means an option derives its value from

something else. In our example, the house is the underlying asset. Most of the time,

the underlying asset is a stock or an index.

 A financial contract obligating the buyer

to purchase an asset (or the seller to sell
an asset), such as a physical commodity
or a financial instrument, at a
predetermined future date and price.

 Futures contracts detail the quality and
quantity of the underlying asset; they are
standardized to facilitate trading on a
futures exchange.

 Some futures contracts may call for
physical delivery of the asset, while others
are settled in cash.

 Futures can be used either to hedge or
to speculate on the price movement of
the underlying asset.

 For example, a producer of corn could
use futures to lock in a certain price and
reduce risk (hedge). On the other hand,
anybody could speculate on the price
movement of corn by going long or short
using futures.

 By participating in the futures market does
not necessarily mean that you will be
responsible for receiving or delivering large
inventories of physical commodities –
remember, buyers and sellers in the futures
market primarily enter into futures contracts
to hedge risk or speculate rather than to
exchange physical goods (which is the
primary activity of the cash/spot market).
That is why futures are used as financial
instruments by not only producers and
consumers but also speculators.

 The consensus in the investment world is that
the futures market is a major financial hub,
providing an outlet for intense competition
among buyers and sellers and, more
importantly, providing a center to manage
price risks. The futures market is extremely
liquid, risky and complex by nature.

Alternative Investments Types

Forex (FX)

 The market in which currencies are traded.

 The forex market is the largest, most liquid
market in the world with an average traded

value that exceeds $1.9 trillion per day and
includes all of the currencies in the world.

 There is no central marketplace for currency
exchange; trade is conducted over the
counter. The forex market is open 24 hours a
day, five days a week and currencies are
traded worldwide among the major financial
centers of London, New York, Tokyo, Zürich,
Frankfurt, Hong Kong, Singapore, Paris and


 Gold that is physical gold should be thought of
as an insurance policy against poor economic
conditions rather than an investment vehicle.

 Having said that we are in a bull market at
present (2009) and it is highly likely you will make
money if you invest in physical gold today.

 Gold prices are on a record-breaking spree
globally due to concerns over rising Covid-19
cases, simmering US-China tensions,
expectations of a second stimulus
announcement in the United States and decline
in the dollar. It has already surged almost 40 per
cent this year as the precious metal is perceived
as currency of last resort and a safe haven in
times of economic and geo-political upheavals.

 A good source of physical gold is Bullion vault.

Time Value of Money (TVM)

 Time value of money is the concept that the value of a dollar to be received
in future is less than the value of a dollar on hand today.

 One reason is that money received today can be invested thus generating more

 Another reason is that when a person opts to receive a sum of money in future
rather than today, he is effectively lending the money and there are risks involved in
lending such as default risk and inflation.

 Default risk arises when the borrower does not pay the money back to the lender. Inflation
is the rise in general level of prices.

 Time value of money principle also applies when comparing the worth of
money to be received in future and the worth of money to be received in
further future.

 In other words, TVM principle says that the value of a given sum of money to be
received on a particular date is more than the same sum of money to be received
on a later date.

Time Value of Money (TVM)

Basic Formulas:

FV = PV x [ 1 + (i / n) ] (n x t)

PV = FV / [ 1 + (i / n) ] (n x t) Where:

FV = Future value of money

PV = Present value of money

i = interest rate

n = number of compounding periods per year

t = number of years

Time Value of Money (TVM)

Assume a sum of $10,000 is invested for five years at 10% interest.

What is the FV?

FV = 10,000 x [ 1 + (10% / 1) ] (1 x 5) =$16,105.1

The present value of $5,000 two years from today, compounded

at 7% interest, is:

PV = 5000/ [ 1 + (7% / 1) ] (1 x 2) = $4,367

Investment Strategies

 An investment strategy is a set of rules, behaviours or procedures, designed to

guide an investor’s selection of an investment portfolio based on goals, risk

tolerance, and future needs for capital.

 The best strategies are those that work best for the individual investor’s objectives

and risk tolerance.

 Investment strategies allow for diversification of risk in the portfolio by investing

in different types of investments and industry based on timing and expected


 A portfolio can be made of a single strategy or a combination of strategies to

accommodate the preferences and needs of the investors.

 Investing strategically allows investors to gain maximum out of their investments.

 Investment strategies help reduce transaction cost and pay less tax.

Investment Strategies

Passive and Active Strategies

 The passive strategy

involves buying and

holding stocks for a period

of time without trading

frequently and to avoid

higher transaction costs.

 Passive investors believe

they cannot outperform the

market due to its volatility,

so they tend to adopt a less

riskier strategy.

 Investors who employ

active strategies buy and

sell frequently.

 These investors believe

they can outperform the

market and can gain

more returns than an

average investor would.

Growth Investing

 Growth strategies imply focusing on the future rather than current profit.

 They look for the “next big thing” and involves evaluating a stock’s current health as well
as its potential to grow.

 It focuses on capital appreciation.

 Growth investors look for companies that exhibit signs of above-average growth, through
revenues and profits, even if the share price appears expensive in terms of metrics such as
price-to-earnings or price-to-book ratios.

 Investors chose the holding period based on the value they want to create in their

 If investors believe that a company will grow in the coming years and the intrinsic value of
a stock will go up, they will invest in such companies to build their corpus value. On the
other hand, if investors believe that a company will deliver good value in a year or two,
they will go for short term holding.

 The holding period also depends upon the preference of investors.

 For example, how soon they want money to say to buy a house, school education of kids,
retirement plans, etc.

Value Investing

 This is a style of investing based on picking shares that have low valuations

relative to their current profits, cash flows and dividend yield. It is one of the two

main approaches to stock picking, the other being growth investing.

 Value investing strategy involves investing in the company by looking at its

intrinsic value because such companies are undervalued by the stock market.

 The idea is that when the market goes for correction, it will correct the value for such

undervalued companies and the price of the stock will increase, leaving investors with

high returns when they sell.

 Value investing strategies can be used by investors looking for either capital

gains or income — although an income investor is likely to use a different value

strategy to one who wants capital gains.

 There is strong evidence that value shares outperform growth shares over the

long term.

Income Investing

 Income investing involves buying securities that generally pay out returns

on a steady schedule.

 This type of strategy focuses on generating cash income from stocks rather

than investing in stocks that only increase the value of your portfolio.

 There are two types of cash income which an investor can earn –
(1) Dividend and (2) Fixed interest income

 Bonds are the best known type of fixed income security, but the category also

includes dividend paying stocks, exchange-traded funds (ETFs), mutual funds,

and real estate investment trusts (REITs).

 Fixed income investments provide a reliable income stream with minimal risk

and depending on the risk the investor is looking to take, should comprise at

least a small portion of every investment strategy.


 This type of investment strategy allows investors

to invest a small portion of stocks in a market


 These can be Standard & Poor 500, mutual

funds, or exchange-traded funds.

Dividend Growth Investing

 In this type of investment strategy, the investor looks

out for companies that consistently paid a dividend

every year.

 Companies that have a track record of paying

dividends consistently are stable and less volatile

compared to other companies and aim to increase

their dividend payout every year.

 The investors reinvest such dividends and benefit from

compounding over the long term.


 This types of strategy allow investors to buy stocks of companies at the time

of the down market.

 This strategy focuses on buying at low and selling at high.

 The downtime in the stock market is usually at the time of recession,

wartime, calamity, etc.

 However, investors shouldn’t just buy stocks of any company during downtime.

They should look out for companies that have the capacity to build up value

and have a branding that prevents access to their competition.

 Contrarian investing can be very successful during bubbles and busts as

contrarian investors are likely to sell during a bubble and buy when the

investors are unduly pessimistic about shares.

 The problem is that the market is right most of the time and therefore contrarians

will find it hard to do well most of the time.

Small Cap Investing

 This strategy involves purchasing stock of small companies

with smaller market capitalization (usually between $300

million and $2 billion).

 An investment strategy fit for those looking to take on a little more

risk in their portfolio.

 Small Cap stocks are appealing to investors due to their

ability to go unnoticed. They to tend to have less attention

on them because:

a) investors stay away from their riskiness and

b) institutional investors (like mutual funds) have restrictions when it

comes to investing in small cap companies.

The Financial Environment

 The financial environment is composed of three key components:

 Financial Managers

 Financial Markets

 Investors (including creditors)

 Financial managers are responsible for deciding how to invest a company’s

fund to expand its business and how to obtain funds (financing).

 The actions taken by financial managers to make financial decisions for their

respective firms are referred to as financial management (or managerial finance).

 Financial decisions will include those that maximize the firm’s value and therefore

maximize the value of the firm’s stock price. They are usually compensated in a

manner that encourages them to achieve this objective.

Financial Markets

 Financial markets represent forums that facilitate the flow of funds among

investors, firms, and government units and agencies.

 Each financial market is served by financial institutions that act as


 The equity market facilitates the sale of equity by firms to investors or between
investors. Some financial institutions serve as intermediaries by executing
transactions between willing buyers and sellers of stock at agreed-upon prices.

 The debt markets enable firms to obtain debt financing from institutional and
individual investors or to transfer ownership of debt securities between investors.
Some financial institutions serve as intermediaries by facilitating the exchange of
funds in return for debt securities at an agreed-upon price.

 Thus, it is quite common for one financial institution to act as the institutional

investor while another financial institution serves as the intermediary by

executing the transaction that transfers funds to a firm that needs financing.

Primary and Secondary Market

Primary Market

 Market for issuing a new security and distributing to saver-lenders.

 Initial Public Offering Market (IPO).

 Investment Banks—Information and marketing specialists for newly
issued securities.

Secondary Market

 Market where existing securities can be exchanged

 New York Stock Exchange

 American Stock Exchange

 Over-the-counter (OTC) markets (NASDAQ).


 Investors are individuals or financial institutions that

provide funds to firms, government agencies, or

individuals who need funds.

 The focus regarding investors is on their provision of funds

to firms.

 Individual investors commonly provide funds to firms by

purchasing their securities (stocks and debt securities).

 The financial institutions that provide funds are referred to

as institutional investors.

 Some of these institutions focus on providing loans, whereas

others commonly purchase securities that are issued by firms.

Investing Over the Life Cycle

 Investors tend to follow different investment

philosophies as they move through different

stages of the life cycle.

Investing Over the Life Cycle

 Growth-oriented Youth Stage
 Twenties and thirties (20s & 30s)

 Growth-oriented investments

 Higher potential growth; Higher potential risk

 Stress capital gains over current income

 Middle-Aged Consolidation Stage

 Ages 45 to 60

 Family demands & responsibilities become important (education

expenses, retirement savings)

 Move toward less risky investments to preserve capital

 Transition to higher-quality securities with lower risk

Investing Over the Life Cycle

 Retirement Stage

 Ages 60 and older

 Preservation of capital becomes primary goal

 Highly conservative investment portfolio

 Income needed to supplement retirement income

 Some investments for each stage

 Growth-oriented: Common stocks, options or futures

 Middle-age: Low-risk growth and income stocks, preferred stocks,
convertible stocks, high-grade bonds

 Income-oriented: Low-risk income stocks and mutual funds, government
bonds, quality corporate bonds, bank certificates of deposit

Ethics in Investing

 For markets to effectively facilitate the deployment of capital resources to
their most productive uses, there must be an acceptable level of
transparency that allows investors to make well-informed decisions.

 Ethical behaviour is congruent to maximizing Shareholders’ wealth.
Companies benefit from having a good reputation and are penalized by
having bad ones.

 Unethical behaviour by individuals have serious personal consequences—ranging
from job loss and reputational damage to fines and even jail time.

 Unethical conduct from market participants, investment professionals, and
those who service investors can damage investor trust and thereby impair the
sustainability of the global capital markets as a whole.

 A strong ethical culture that helps honest, ethical people engage in ethical
behaviour will foster the trust of investors, lead to robust global capital
markets, and ultimately benefit society.

The Financial Services Commission


The Commission is an integrated regulator with responsibility for the

regulation of all financial services businesses operating in or from the

Turks and Caicos Islands (TCI), and the supervision of designated non-
financial business and persons (DNFBPs) and not-for-profit entities

operating in or from the TCI.

The Commission, through the Commercial Registry, is also responsible

for the administration of company formation, registration, patents,

trademarks and business names.

The Securities and Exchange

Commission (SEC)

 Securities Exchange Act of 1934

 With this Act, Congress created the Securities and Exchange Commission.

The Act …

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