FIN401-Chapter 22 notes

FIN401-Chapter 22 notes - Chapter 22 Chapter 22 The...

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Unformatted text preview: Chapter 22 Chapter 22 The Investment Process Overview of the Investment Process Overview of the Investment Process ► Specify objectives ► Identify constraints ► Formulate an investment policy ► Monitor performance ► Reevaluate and modify portfolio (as necessary) Overview of the Investment Process Overview of the Investment Process 22-3 Individual Investors Individual Investors ► Balance risk and return » Life cycle is critical ► Investor type: » Younger investors: bear more risk for higher bear returns returns » Older investors: accept lower returns for lower risk risk Professional Investors Professional Investors ► Personal trust » Trustee manages assets » Fiduciary responsibility leads to less risky investments investments ► Mutual funds » Objectives are stated in the prospectus Objectives stated » Objectives vary by fund type Objectives fund Professional Investors Professional Investors ► Pension funds » Defined contribution » Defined benefit ► Insurance companies » Life insurance - Invest to hedge liabilities » Non-life insurance - Typically conservative Professional Investors Professional Investors ► Banks » Source of funds: deposits and borrowed funds Source » Investment of funds: lloans and fixed income oans Investment securities securities » Active in securitized loans securitized » Not active in equity (except in Trusts) equity ► Endowment funds » Gifts are invested Gifts Investor Constraints Investor Constraints ► liquidity ► Investment horizon ► Regulations » prudent investor rule ► Tax considerations ► Unique needs Asset Allocation Decision Asset Allocation Decision ► Money market assets Cash equivalents ► Fixed­income securities Primarily bonds ► Stocks ► Non­U.S. stocks and bonds ► Real estate ► Precious metals and other commodities ► More conservative approach More weight in bonds and cash equivalents Asset Allocation Decision Asset Allocation Decision ► Choices will be determined by: → capital market expectations → risk tolerance → financial needs Institutional Investors Institutional Investors ► Investment committee → senior managers who: * formulate investment policy and verify/monitor * establish asset universe (list of approved assets) * make broad asset allocation decisions Asset Allocation and Security Selection for Asset Allocation and Security Selection for Palatial Investments 22-12 Monitoring and Revising Monitoring and Revising ► By the time investor completes investment steps, inputs may be out of date ► Circumstances can change over time ► Portfolio weights will change as prices change ► Asset allocation will change over time ► Investing is a dynamic process ...
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This note was uploaded on 12/10/2011 for the course FIN 401 taught by Professor Staff during the Spring '08 term at Miami University.

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