INVESTMENT AND
PORTFOLIO
MANAGEMENT
Investment Defined
Investment Defined
An investment is an asset or item acquired with the goal of
generating income or appreciation
An investment is a purchase that is completed with money
that has the potential to produce income or a profit.
Investment Defined
Investment – is the current commitment of dollar for a period
of time in order to derive future payments that will
compensate the investor for the (1) time the funds are
committed (2) the expected rate of inflation during this time
period and (3) the uncertainty of future payments.
Investment Defined
What about an INVESTOR,
what do you mean by INVESTOR.
Investment Defined
The investor can be an individual, a government, a pension fund or a corporation.
Similarly this type of investment include all types of investments including investments
by corporation in plant and equipment and investments by individual in stocks, bonds,
commodities, or real estate.
Investment Defined
In all cases, the investor is trading a known dollar amount today for some
expected future stream of payments that will be greater than the current dollar
amount today.
Types/Kinds of Investment
Types/Kinds of Investment
• Stocks
• Bonds
• Cash equivalent
Types/Kinds of Investment
• Stocks
Types/Kinds of Investment
• Stocks
Companies sell shares of stock to raise money for start-up or growth. When
you invest in stocks, you’re buying a share of ownership in a corporation.
You’re a shareholder.
Types/Kinds of Investment
• Stocks
There are two types of stock:
• Common stock.
• Preferred stock.
Types/Kinds of Investment
• Stocks
There are two types of stock:
• Common stock.
• Preferred stock.
The main difference between preferred and common stock is that preferred stock gives
no voting rights to shareholders while common stock does. Preferred shareholders have
priority over a company's income, meaning they are paid dividends
before common shareholders.
Types/Kinds of Investment
• Stocks
Stockholders/Shareholders have a percentage of ownership
Types/Kinds of Investment
• Bonds
Types/Kinds of Investment
• Bonds
Bonds are issued for a set period of time during which interest payments are made to
the bondholder. The amount of these payments depends on the interest rate
established by the issuer of the bond when the bond is issued. This is called a coupon
rate, which can be fixed or variable. At the end of the set period of time (maturity
date), the bond issuer is required to repay the par, or face value, of the bond (the
original loan amount).
Bonds are considered a more stable investment compared to stocks because they
usually provide a steady flow of income. But because they’re more stable, their long-
term return probably will be less when compared to stocks. Bonds, however, can
sometimes outperform a particular stock’s rate of return.
Keep in mind that bonds are subject to a number of investment risks including credit
risk, repayment risk and interest rate risk.
Types/Kinds of Investment
• Cash equivalent
Cash equivalent investments protect your original investment and let you have
access to your money
Examples – savings accounts
money market
treasury bills and bonds
time deposits
other debt securities approved by BSP
5 Investment Questions
Investments are tools to help you reach your goals. Knowing more about how to use
them may help improve your financial future. The answers to a few simple investment
questions can move you a long way toward understanding what you need and how your
portfolio can help. Think about your investment portfolio and ask a financial professional
these 5 questions:
5 Investment Questions
1. What is this money for?
5 Investment Questions
1. What is this money for?
Most people find it easier to allocate their savings toward particular goals. Are you saving
for retirement? Is this an emergency fund? Do you want to take a dream vacation? Are
you concerned about paying for long-term care in retirement?
Determining your broad objectives will help you make decisions about such issues as the
amount of risk you are willing to tolerate and the types of investment products that fit
best with your philosophy. For example, if your goal is an emergency fund, you might
select a low-risk investment, which in turn may mean that it has a smaller return.
5 Investment Questions
2. What is the expected rate of return?
5 Investment Questions
2. What is the expected rate of return?
Of course, you want to make as much money as possible, but it's important to
remember that the way you choose to invest that money may have particular
constraints that can limit how much — or how quickly — you see returns on that
investment. There are two main factors that affect returns: risk and fees. It helps to
understand how much money an investment is likely to make; the form of that return,
such as capital gains, interest or dividends; and the cost of the investment. With that
understanding, you can make the investment decision that aligns with your financial
goals.
For example, some people choose retirement investments that have a potentially
higher rate of return because they have more time to make up losses, which may not
be the case with money allocated for a down payment on a first house.
5 Investment Questions
3. How much risk can I tolerate?
5 Investment Questions
3. How much risk can I tolerate?
All investing involves some risk. This means that, no matter the type of investment you
make, there's a level of uncertainty regarding how the investment may perform or how
much money you might — or might not — earn from it. This means your investment may
earn more than you expect in any one year, or you may lose some or all of the investment.
How much risk you can bear depends not only on your personal temperament but also on
how much time will pass until you need the money — and what your overall financial
position is.
5 Investment Questions
4. What is my tax situation?
5 Investment Questions
4. What is my tax situation?
Certain types of investments carry tax advantages, at least for some investors. For example,
making contributions to retirement plans, college savings plans and certain types of life
insurance policies may reduce income taxes for the year you invest that money. Whether or
not you may benefit depends on what state you live in and your overall financial situation.
Selling some investments also impacts your taxes for the year. If you earned money on the
investments you made, you pay capital gains taxes on the profit you earned. If you sell an
investment at a loss, meaning less than you paid for it, you can claim that loss to lower other
capital gains amounts on your tax return for the year.
5 Investment Questions
5. What are my special needs and circumstances?
5 Investment Questions
5. What are my special needs and circumstances?
People and families differ in their financial needs. Maybe you have stock from your
employer, expect to inherit farmland from your grandfather or have a religious objection
to certain types of investments. Other common but special circumstances include the
need to provide for a child with a disability, pursue philanthropic interests or support a
blended family. These will affect your financial goals, your risk and return requirements,
and possibly your tax situation.
This isn’t a one-time exercise. Your financial situation and the financial markets will
change over time, so revisiting these questions will help keep you on track. As the answers
to these investment questions change, you can alter your financial planning so that your
money continues to work for you. Make sure you have a knowledgeable financial
professional help you answer these questions and make sound decisions that address
your needs.
Uncertainty in Investment
Sources of Uncertainty
(1) business risk,
(2) financial risk (leverage),
(3) liquidity risk,
(4) exchange rate risk, and
(5) country (political) risk.
Uncertainty in Investment
Sources of Uncertainty
(1) business risk,
Business risk is the uncertainty of income flows caused by the nature of a firm’s
[Link] less certain the income flows of the firm, the less certain the income
flows to the investor. Therefore, the investor will demand a risk premium that is based
on the uncertainty caused by the basic business of the firm. As an example, a retail
food company would typically experience stable sales and earnings growth over
time and would have low business risk compared to a firm in the auto or airline
industry, where sales and earnings fluctuate substantially over the business cycle,
implying high business risk.
Uncertainty in Investment
Sources of Uncertainty
(2) financial risk (leverage),
Financial risk is the uncertainty introduced by the method by which the firm finances its
investments. If a firm uses only common stock to finance investments, it incurs only
business risk. If a firm borrows money to finance investments, it must pay fixed financing
charges (in the form of interest to creditors) prior to providing income to the common
stockholders, so the uncertainty of returns to the equity investor increases. This increase in
uncertainty because of fixed-cost financing is called financial risk or financial leverage,
and it causes an increase in the stock’s risk premium
Uncertainty in Investment
Sources of Uncertainty
(3) liquidity risk,
Liquidity risk is the uncertainty introduced by the secondary market for an investment.
When an investor acquires an asset, he or she expects that the investment will mature
(as with a bond) or that it will be salable to someone else. In either case, the investor
expects to be able to convert the security into cash and use the proceeds for current
consumption or other investments. The more difficult it is to make this conversion to
cash, the greater the liquidity risk.
Uncertainty in Investment
Sources of Uncertainty
(3) liquidity risk,
An investor must consider two questions when assessing the liquidity risk of an
investment:
How long will it take to convert the investment into cash?
How certain is the price to be received?
Uncertainty in Investment
Sources of Uncertainty
(4) exchange rate risk, and
Exchange rate risk is the uncertainty of returns to an investor who acquires securities
denominated in a currency different from his or her own. The likelihood of incurring this
risk is becoming greater as investors buy and sell assets around the world, as opposed to
only assets within their own countries.
Uncertainty in Investment
Sources of Uncertainty
(5) country (political) risk.
Country risk, also called political risk, is the uncertainty of returns caused by the
possibility of a major change in the political or economic environment of a country.
References
Investment Analysis and Portfolio Management
by Reilly and Brown
Understanding Investment Analysis and Portfolio
Management
By Keith Brown and Frank Reilly
Prof. Ma. Nonette M. Merene
