1. CHAPTER TWENTY-THREE INVESTMENT MANAGEMENT

2. n TRADITIONAL INVESTMENT MANAGEMNT ORGANIZATIONS Security Analysts play a key role and rely upon information and reports from 3 economists 3 technicians 3 market expert Investment Committee is advised by the analyst to create An Approved List of Securities

3. INVESTMENT MANAGEMENT

4. INVESTMENT MANAGEMENT FUNCTIONS n FIVE STEP PROCEDURE: SETTING INVESTMENT POLICY PERFORMING SECURITY ANALYSIS CONSTRUCTING A PORTFOLIO REVISING THE PORTFOLIO EVALUATING THE PORTFOLIO

5. INVESTMENT MANAGEMENT FUNCTIONS n SETTING INVESTMENT POLICY DETERMINE THE INVESTMENT OBJECTIVE 3 estimate the client’s level of risk tolerance

6. INVESTMENT MANAGEMENT FUNCTIONS n PERFORMING SECURITY ANALYSIS Security Selection: A 2 Stage Procedure STAGE I: forecast 3 expected returns 3 standard deviation 3 covariances 3 identify optimal portfolio

7. INVESTMENT MANAGEMENT FUNCTIONS n PERFORMING SECURITY ANALYSIS Security Selection: A 2 Stage Procedure STAGE II: Asset Allocation 3 strategic – refers to how a portfolio’s funds would be divided, given the manager’s long-term forecasts from Stage I 3 tactical – given short-term forecasts, who will assets be allocated at any one time

8. REVISING THE PORTFOLIO n REVISING THE PORTFOLIO Use Cost-Benefit Analysis 3 transaction costs should be examined since they complicate the management decision 3 portfolio revisions must be weighed against the cost of revision particularly with regard to transaction costs

9. REVISING THE PORTFOLIO n REVISING THE PORTFOLIO SWAP METHODOLOGY 3 a cost saving method which involves exchanges of asset rather than purchases or sales 3 TYPES OF SWAPS: – Equity – Interest Rate

10. REVISING THE PORTFOLIO n REVISING THE PORTFOLIO SWAP METHODOLOGY 3 The Equity Swap: – The Agreement one party agrees to pay the other a variable- sized cash payment the other party agrees to a fixed-sized cash payment – Results in a restructured portfolio without incurring any transaction costs

11. REVISING THE PORTFOLIO n REVISING THE PORTFOLIO SWAP METHODOLOGY 3 The Interest Rate Swap – The Agreement one party pays the second a variable-sized stream of cash based on the current level of an agreed-upon interest rate (e.g. LIBOR) second party pays the first a fixed-sized payment stream based on the interest rate at the time of the Agreement – Results in a restructured portfolio without incurring any transaction costs

12. THE MARKET FOR SWAPS n THE MARKET FOR SWAPS The Market 3 Is unregulated for the most part – no government agency responsible for it – privacy – each party must pay close attention to the solvency of the other party 3 Swap Banks are the heart of the market – they act as dealers – arrange for creation and dissolution of agreements

13. END OF CHAPTER 23