04 - Lecture 4 Diversification, Risk, and Portfolio...

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1 Lecture 4 - Diversification, Risk, and Portfolio Management BM Ch 1, 3, 7; TJHM Ch 4; CCH Ch 9; Day et al Ch 18 2 Financial Products (CCH 8-220) • Wide range of financial products deposit products shares, derivatives, etc. debentures issued by companies bond issues by a government managed investment schemes life insurance products superannuation products 3 Direct Investments • Refers to buying investment products directly from the market often through an intermediary (broker, dealer, agent) • Investor obtains absolute ownership of an asset by purchasing and holding directly • Concentrate on four main asset classes: –c a s h interest-bearing (fixed-interest) securities shares (equities) property
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4 Indirect Investments • Units in a managed investment scheme (MIS) – individual’s money pooled to purchase assets that a person would have difficulty acquiring as an individual • Decisions on assets included or deleted are made by fund manager • Investor places funds (or property) with a trust or body corporate – fund manager undertakes investment program – investor receives share of income – Example - cash management accounts shares in listed investment companies (LICs), life office statutory funds (ins. bonds, annuities), unit trusts (mortgage, equity, property), friendly society bonds 5 Investment Fundamentals • Investment in financial and real assets which are expected to produce a return over time • Return may include income and/or capital growth • Fundamental rule of investing - the greater the reward, the greater is the risk • Investment decision requires foregoing current consumption in expectation of future rewards which will compensate for: – time funds are committed – effects of inflation, taxation – volatility of returns • Advisors must consider the different cash flow characteristics of investment products, liquidity needs of investor, risk, objectives, etc. 6 Keys to Investing 1. Objective ± What is the reason for investing? Education, car, house, supplement income ± Choice between investing for income, or growth, or both ± income - fixed deposits, government and corporate bonds, bank bills ± growth - public-listed shares, managed funds ± income and growth - residential and commercial properties 2. Horizon ± Time period over which investment allowed to grow ± match between horizon and maturity of assets 3. Risk tolerance ± Tolerance for volatility (magnitude and frequency of fluctuations between gain and loss) ± Risk-return trade-off
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7 Keys continued 4. Liquidity ± How easily can the asset can be converted into ± greater the liquidity, the less the yield and vice versa 5. Taxation ± Each investment has its own taxation attributes and impact upon the investor’s tax position 6. Diversification ± Achieving an optimal return for the given level of risk 8 Efficient Market Concept • Introduces the idea of passive and active management strategies • Assumption of an efficient market is that securities
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04 - Lecture 4 Diversification, Risk, and Portfolio...

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