1. Investment Process Flashcards
Investment process definition
Describes how investor should go about making decisions with regard to what marketable securities to invest in, how extensive investment should be, when investment should be made
Investment process steps
- Set investment policy
- Perform security analysis using fundamental analysis
- Construct portfolio
- Revise portfolio
- Evaluate performance
How to set investment policy
Identify investor’s unique objective, determine amount of investable wealth, state objectives in terms of risk and return, and identify potential investment categories
Difference asset allocation and security allocation
- Asset allocation: choice among broad asset classes.
- Security selection: choice of which securities to hold within asset class
Investment policy should address
a. Mission statement, long-run financial goals
b. Risk tolerance: amount of risk that investor is willing to bear
c. Policy asset mix, long-run allocation to broad asset classes
d. Choice for active or passive management
Factors that affect risk tolerance
- Maturity: the longer the maturity, the more risk
- Risk characteristics and creditworthiness of issuer or guarantor of investment
- Nature and priority: of claims investment has on income and assets
- Liquidity of instrument and type of market.
How to perform security analysis using fundamental analysis
- Intrinsic value should equal discounted present value
- Find mispriced securities
- Compare current market price to true market value
How to construct a portfolio
Identify specific assets and proportion of wealth in
which to invest, address issues of selectivity, timing, diversification
How to revise portfolio
Periodically repeat step 3, revise if necessary
(increase/decrease existing securities, delete some securities, and add
new securities)
How to evaluate performance
Periodic determination of performance with respect
to risk and return, requires appropriate measures of risk and return
