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Brailsford3eSM_Ch19 - Chapter 19 Portfolio management...

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Copyright © 2006 Nelson Australia Pty Limited Chapter 19 Portfolio management Learning objectives After the completion of this chapter, you should be able to: understand the role and use of managed funds describe the managed funds industry discuss the types of managed funds and investment products identify common strategies used in portfolio management demonstrate a practical understanding of the asset allocation decision understand what is meant by active and passive management describe what is meant by index tracking and explain how it relates to diversification compare and contrast the use of cash matching and immunisation as bond portfolio management techniques compare interest rate anticipation and bond swapping as alternative active bond management strategies understand how portfolio insurance works explain what market timing is and contrast this strategy with a buy-and-hold strategy Key points 1 The material in this chapter focuses on alternative investment strategies. These strategies are typically divided into passive and active. 2 Passive strategies are where the fundamental objective behind the portfolio is diversification. Examples include buy-and-hold or index tracking. 3 Active portfolio management requires superior skills and an ability to forecast price changes Chapter outline 19.1 Introduction 1 Investors typically have portfolio focus. In response to this focus, many investors transfer investment decision-making to a professional manager. The fund manager acts as an intermediary between the investor and the investment markets 2 Common investment strategies undertaken by investors include investing all funds with funds manager, investing in multiple funds, investing some portion in funds and the rest in direct share investment. The choice of fund depends on investors risk tolerance and preferences for such issues as growth and stability. 19.2 The investment funds industry 1 Individuals place their money with a professional fund manager. In return, fund managers charge a fee for their service. From the individual’s point of view, there is a perception of
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2 Investments: Concepts and Applications Solutions Manual Copyright © 2006 Nelson Australia Pty Limited better skills and management experience, which it is hoped will translate into higher risk- adjusted returns. 2 Types of funds include superannuation funds, public unit trusts, life office funds and individual funds. These can be organised according to fund objective (growth, capital stable or income). 19.3 Asset allocation and selection 1 The main decisions of managed fund is asset allocation and stock selection. 2 Asset allocation is concerned with how the portfolio is spread across classes of assets, such as equities, fixed interest, cash and property.
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Brailsford3eSM_Ch19 - Chapter 19 Portfolio management...

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