INVESTMENT

MANAGEMENT
INTRODUCTION

OBJECTIVES
Students are able to explain
1. the importance of capital markets
2. How to analyze financial investment

WHAT IS AN INVESTMENT?
When current income exceed current consumption desires,
people tend to save the excess. What they do?
1. Put the money under a mattress, or bury the money in the
backyard until some future times when consumption
desires exceed current income when they retrieve their
savings from the mattress or backyard, they have the
same amount they saved
2. Give up the immediate possession of the savings for a
future larger amount of money that will be available for
future consumption reason for saving: trade off of
present consumption for a higher level of future
consumption what we do with the savings to make
them increase over time is called INVESTMENT

WHAT IS AN INVESTMENT?
An investment is the current commitment of dollars for a
period of time 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
3. The uncertainty of the future payment

This includes all types of investments, including investments

by corporations in plant and equipment and investments by
individuals in stocks, bonds, commodities, or real estate
The investor is trading a known $ amount today for some
expected future stream of payments that will be greater than
the current outlay

WHO ARE THE INVESTOR?

The investor can be
1. An individual
2. A government
3. A pension fund
4. A corporation

CONCEPT OF RATE OF INTEREST

Current
consumption

Current dollars

Future
consumption

Future dollars

Pure rate of
interest

Pure time
value of money

The rate of exchange between future consumption and

current consumption is the pure rate of interest.

ALTERNATIVES OF INVESTMENTS
Financial assets

Real assets

1. Equity claims - direct

1. Real estate

Common stocks, warrants, options

Office buildings, apartments, shopping

centers, personal residences

2. Equity claims - Indirect

2. Precious metals

Investment company shares (mutual

Gold, diamonds
funds), pension funds, whole life insurance
3. Creditor claims

3. Precious gems

Saving accounts; money market funds;

commercial paper; treasure bills, notes,
bonds; municipal notes, bonds; corporate
bonds (straight and convertible to
common stocks)

Diamonds, rubies, sapphires

4. Collectibles
Art, antiques, stamps, coins, rare books

4. Preferred stock (straight and convertible 5. Other

to common stocks)

5. Commodity futures

Cattle, oil, common metals

THE SETTING OF INVESTMENT OBJECTIVES

1. Risk and safety of principal
The amount of risk the investors are prepared to assume
In relatively efficient and informed capital market environment,
risk tends to be closely correlated with return
Those who consistently demonstrate high returns of 20% or more
are greater-than-normal risk takers high returns may be
perceived as compensation for risk

2. Current income Vs Capital appreciation

A decision on the desire for current income vs capital appreciation
Searching for price gains may look toward smaller, emerging firms
in high technology, energy or electronics that may not pay
dividends investors hope for an increase in value to provide the
desired returns

THE SETTING OF INVESTMENT OBJECTIVES

3. Liquidity consideration
Liquidity is measured by the ability of the investor to convert an
investment into cash within a relatively short time at its fair
market value or with a minimum capital loss on the transaction
Investor prefers stocks and bonds that can generally be sold within
a matter of minutes at a price reasonably close to the last traded
value

4. Short-term Vs Long-term orientation

Decide whether you will assume a short-term or long-term
orientation in managing the funds
Trader, who engage in short-term markets use technical analysis.
Those who take a longer-term perspective identify fundamental
companies

THE SETTING OF INVESTMENT OBJECTIVES

3. Tax factors
4. Ease of management
5. Retirement and estate planning considerations

SYSTEMATIC & UNSYSTEMATIC RISK

Financial theory must consider the link between two or more
investment to determine the combined risk level.
Part of the risk of one investment may be diversified away
with a second investment. Example: an investment in an oil
company may risky because oil prices may drop. But, if the
second investment in petrochemical that will benefit from
lower oil prices, then the risk will be diversified
Unsystematic risk is risk that can be diversified away in a wellconstructed portfolio it is not assumed to be rewarded
with higher returns in the financial markets
Systematic risk is inherent in the investment, and cannot be
diversified away it is assumed to be rewarded in the
market place

CAREER OPPORTUNITIES IN INVESTMENT

1.

Stockbroker advise and execute orders for individuals or

institutional accounts

2. Security analyst of portfolio manager research various

companies and industries, develop portfolio. They might work
for a brokerage house, a bank trust management, in
institutional investors
3. Investment banker distribution of securities from the issuing
corporation to the public, advise corporate clients on their
financial strategy, arrange mergers & acquisitions
4. Financial planner solve the investment and tax problems of
individual investor. It includes specially trained representatives
of insurance industry, accountants, Certified Financial Planners