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Lec 6 - LECTURE 6 Macroeconomic and Industry Analysis...

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AF3316 Investments Shaojun (Shaun) Zhang, Ph.D. ASA School of Accounting and Finance The Hong Kong Polytechnic University LECTURE 6 LECTURE 6 Macroeconomic Macroeconomic and Industry and Industry Analysis Analysis
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6-2 AF3316 Lecture 6 Synopsis of the Investment Process The Client Risk Tolerance/ Investment Horizon Tax Status Liquidity Needs The Portfolio Manager’s Job Asset Allocation Stocks Bonds Real Estate Others Domestic Nondomestic Views on correlations Views on relative returns of various asset classes Security Selection - Which stocks? Which bonds? Which real assets? Execution - How often do you trade? - How large are your trades? - Do you use derivatives to manage or enhance risk? Fundamental and Technical Analysis Private Information Trading Speed Trading Costs -Commissions -Bid/Ask Spread -Price Impact Performance Evaluation 1. How much risk did the portfolio manager take? 2. What return did the portfolio manager make? 3. Did the portfolio manager underperform or outperform? Stock Selection Market Timing
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6-3 AF3316 Lecture 6 From Previous Discussion….. The first step in the investment process is asset allocation that is, the decision of dividing the total investment money into various asset classes After asset allocation, the second step in the investment process is security (or asset) selection that is, choosing individual stocks, bonds or other financial assets The security selection decision with respect to stocks is referred to as stock selection
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6-4 AF3316 Lecture 6 Peter Lynch Managed the Fidelity Magellan Fund from 1977 to 1990 The fund's assets grew from $20 million to $14 billion An annual average return of 29% “Many people prefer to invest in a high-growth industry, where there’s a lot of sound and fury. Not me. I prefer to invest in a low-growth industry… In a low- growth industry, especially one that’s boring and upsets people [such as funeral homes or the oil-drum retrieval business], there’s no problem with competition. You don’t have to protect your flanks from potential rivals… and this gives [the individual firm] the leeway to continue to grow.”
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6-5 AF3316 Lecture 6 Rationales for Fundamental Analysis Every stock has a fundamental value
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