Investment & Portfolio
Management
Broad Course Outline
• Introduction
• Understanding nature of financial assets/ investment options
• Understanding basic mechanism of securities markets
• Efficient Capital Markets vs. behavioral finance
• Measurement of Risk and Return
• Portfolio theory & asset allocation
• Capital Asset Pricing Model (CAPM)
• Security analysis – Macroeconomic analysis, industry analysis, stock
valuation
• Technical Analysis
Text Books
• Investments by Bodie, Kane, & Marcus
• Investments: Analysis and Management by Charles P. Jones
• Investment Analysis & Portfolio Management by Reilly & Brown
Introduction
• Investment: Current commitment of money or other resources in the expectation of reaping future
benefits.
• Stocks, Bonds, Real Estate, Derivatives
• Portfolio: Collection of investment to achieve investment objectives.
• Return, Risk, & Liquidity
• Real Assets: Produce goods & services in an economy.
• Land, Building, Plant & Machinery, Knowledge
• Financial Assets: Represent claim on real assets (income generated by real assets), do not have any
productive capacity
• Stocks, Bonds etc.
Investors buy financial assets Companies use this money to invest in real assets Real assets define
productive capacity of an economy – financial assets represent allocation of income/wealth among
investors
*This course focuses more on financial assets.
Financial Assets
1. Fixed Income/ Debt securities: Promise either a fixed stream of income or a
stream of income determined by a specified formula.
1. Money Market – Short term – liquid – low risk securities
2. Capital Market – Long term – varying risk securities
2. Equity: Represents an ownership stake in the firm.
3. Derivatives: Payoffs/ value is determined on the bases of prices of other
securities/ assets – used for hedging risk
1. Forwards
2. Futures
3. Options
4. Swaps
Payoffs/ success of financial assets depends on productive capacity of real assets.
Required rate of return
Required return = Risk Free Rate + Risk Premium
Rit= Rf +RP
Where
Rf = Real Risk Free Rate + Inflation Premium
Capital Asset Pricing Model – CAPM
Rit= Rf + 𝛽(Rm – Rf)
Financial Markets and Economy
• Informational role of Financial Markets
• Help to allocate capital to most efficient use
• Consumption timing
• Time consumption according to saving & consumption needs
• Allocation of risk
• Providing various alternatives in accordance with risk tolerance of investors
• Separation of ownership and management
• Stable form of business firm – Owners may change, management remains the same
• Potential agency problems – overinvestment and wasteful behavior
• Aligned compensation
• Board of directors
• Institutional investors
• Takeovers
• Corporate governance and corporate ethics
• Agency issues – Frauds in financial disclosure
• Analysts reports – quid pro quo
• Role of Auditors
Investment process
• Portfolio construction
• Asset allocation – which asset to choose from: Bonds, stocks, real estate
• Security selection – Choosing between different securities of same asset class
• Approaches
• Top-Down approach – Starting with asset allocation
• Bottom-Up approach – Starting with security selection
Financial Markets
• Markets are competitive
• Risk-Return trade off – More risk More return
• Markets are efficient – All relevant information is quickly and
efficiently reflected in stock prices
• Weak form efficiency – Past volume & Prices
• Semi-Strong form efficiency – All publically available information
• Strong form efficiency – All public & private information
Active vs. Passive Investment
*Markets are efficient because so many people think that they are not.
Players in Markets
• Firms – Demand capital
• Public/ Household – Suppliers of capital
• Governments – demand or supply –
mostly demand funds
Facilitators/ Channels
1. Venture capital and private equity
2. Investment bankers - Help or manage
security issuance in primary markets
• IPO (Initial Public Offering)
• SEO (Seasoned Equity Offering)
3. Financial intermediaries – banks,
insurance companies, investment
companies – issue their own security
to supplier of funds
Assignment
Read and provide description of:
• Dot Com bubble of 2001 – one page max
• Financial crisis of 2008 – one page max
Submit your work to your CR by next Thursday, April 29, 2021.
CR will make a zip file and email me on the same date. No late
submissions will be entertained.
