Investments Flashcards
Points of commentary on investments
–Security
–Yield
(vs alternatives and inflation)
–Spread
–Term
–Expenses
–Exchange rate
–Marketability
–Tax
Risk premia
(bad parts of SYSTEM T)
–Marketability risk
–Uncertainty
–Inflation risk
–Liquidity risk
–Default risk
capital + income
Factors affecting investment strategy
- -Liabilities
- -Expected long term returns from different asset classes
- -Tax
- -Size of assets
- -need for Diversification
- -institution’s Objectives
- -Strategy followed by other funds
- -Existing asset portfolio
- -institution’s risk Appetite
- -Restrictions on Investments
- -Valuation and Solvency requirements
Issues to consider before tactical switch
- -level of Free assets
- -Additional returns relative to risk
- -Constraints (regulation)
- -Expenses of the switch
- -Problems of switching a large portfolio of assets
Forms of valuation of assets
- -(historic) Book value
- -Adjusted book value
- -Market value
- -Smoothed market value
- -Fair value
- -Arbitrage value
- -Discounted CF
- -Stochastic model
Assumptions for valuation of asset classes
- -investors want Real return
- -investors have same Time horizon
- -Reinvestment risks ignored
- -Tax differences can be ignored
Investment Type:
Money Markets
(attractiveness)
--Protect market value (stable nominal) --Opportunities (quick conversion to invest) --Uncertain outgo (precautionary holdings) --Received cashflow with nowhere to go yet --Short-term liabilities (transactional purposes)
- -General economic uncertainty
- -Recession
- -Interest rates rise
- -Depreciation of domestic currency
Investment Type:
Bonds
(yield curve theories)
- -Liquidity preference theory
- -Inflation risk premium theory
- -Market segmentation theory
- -Expectations theory
Investment Type:
Equities
(why + why not do we categorise according to industry)
Why: --similar Factors (… **same source and form of Information - due to regulation and industry sources **same Resources used - costs **supply to same Markets **same financial Structure - thus affected by market changes similarly )
–Application purposes
(…
**structure in Decision making and portfolio Management
**Specialisation purposes - easier to focus
)
Why not:
- -Heterogeneity within industries
- -difficult to classify Multi-industry companies
Investment Type:
Property
(prime property characteristics)
- -number of Comparable properties available for rent review/valuation purposes
- -Age and condition
- -Location
- -Lease structure
- Size
- Tenant quality
Investment Type:
Property
(marketability issues)
–Uniqueness
–Valuation process
(no central market: all professional judgement)
–Indivisible and Large units
Attractiveness of Collective Investment Schemes
–Diversification
–Access to large/unusual investments
–Tax benefits (+/-)
–Expertise
–economise of Scale
(on expenses?)
Alternative acronym:
- Discount to NAV (cheaper)
- Access to large/unusual assets
- Diversification
- Economies of Scale for larger schemes
- Divisibility
- Increased expected returns due to gearing and volatility
- direct’s Expenses are avoided
Attractiveness of Overseas investment
- -Matching foreign investment
- -Increase expected returns
- -increased Diversification
Problems with Overseas investment
- -Expenses and Expertise
- -Adverse currency movements
- -Taxation
- -Politics
- -Information asymmetries
- -Language problems
- -Liquidity problems in less developed markets
- -Ownership restrictions
- -different Accounting practices
- -different Regulation
- -Time delays
Methods of having indirect overseas exposure
- -local substantial Exporters
- -Derivatives based in overseas markets
- -Multinational companies based locally
- -Collective investment schemes
