Essentials-of-Investments--Chapter-021.pptx

McGraw-Hill/Irwin 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Investors and the Investment ProcessCHAPTER 2121-221.1 INVESTORS AND OBJECTIVES21-3Overview of the Investment ProcessSpecify objectivesIdentify constraintsFormulate an investment policyMonitor performance Reevaluate and modify portfolio as determined from monitoring21-4Specifying Objectives:Individual InvestorsBalance risk and returnLife Cycle is critical to the process of determining the risk/return trade-offYounger investors Younger investors-willing to bear more risk-willing to bear more risk for higher returnsfor higher returnsOlder investors Older investors-willing to accept lower-willing to accept lower returns for lower riskreturns for lower risk21-5Table 21.1 Amount of Risk Investors Said That They Were Willing to Take by Age21-6Specifying Objectives:Professional InvestorsPersonal TrustsDetermined by the individual for whom the Determined by the individual for whom the funds are being managedfunds are being managedMutual FundsVaries with type of fundVaries with type of fundDetailed in the prospectusDetailed in the prospectus21-7Specifying Objectives:Professional Investors(cont.)Pension FundsPension Funds Defined contribution-shifted to the individualDefined contribution-shifted to the individual Defined benefit-depends on average time to Defined benefit-depends on average time to retirement of individualsretirement of individualsEndowment FundsEndowment Funds Gifts to nonprofits are investedGifts to nonprofits are invested Funds from the endowment used by the nonprofitFunds from the endowment used by the nonprofit21-8Specifying Objectives:Insurance CompaniesLife CompaniesInvestments are hedged against potential Investments are hedged against potential claims of policy holdersclaims of policy holdersNon-Life CompaniesInvest premiums not paid back to Invest premiums not paid back to policyholders for losspolicyholders for lossHedge against potential claimsHedge against potential claims21-9Specify Objectives:BanksSources of funds:deposits and borrowed fundsInvestment of funds:predominately in loans and fixed income securitiesActive in the securitized loan and asset marketsNot active in equity except in the Trust Function21-1021.2 INVESTOR CONSTRAINTS21-11Investor ConstraintsLiquidity-speed and ease with which asset can be converted into cashInvestment Horizon-the planned liquidation dateRegulations-specific regulations that may apply to the investorPrudent investor rulePrudent investor rule21-12Investor Constraints(cont.)Tax Considerations-special considerations related to tax position of the investorUnique Needs-special considerations related to the underlying investors21-13Table 21.2 Determination of Portfolio Policies21-1421.3 OBJECTIVES AND CONSTRAINTS OF VARIOUS INVESTORS21-15Table 21.3 Matrix of Objectives21-16Table 21.4 Matrix of Constraints21-1721.4 INVESTMENT POLICIES21-18Investment Policy:Asset Allocation DecisionMoney market assetsMoney market assets Cash equivalentsCash equivalentsFixed-income securitiesFixed-income securities Primarily bondsPrimarily bondsStocksStocksNon-U.S.stocks and bondsNon-U.S.stocks and bondsReal estateReal estatePrecious metals and other commoditiesPrecious metals and other commoditiesMore conservative approachMore conservative approach More weight in bonds and cash equivalentsMore weight in bonds and cash equivalents21-19Top-Down Policy for Institutional InvestorsStructured to promote efficiencyAsset universeApproved list of companies for the asset groups21-20Figure 21.1 Asset Allocation and Security Selection for Palatial Investments21-21Investment Policy:Active or PassiveActiveTrying to secure better than average Trying to secure better than average performanceperformanceMust balance returns and costsMust balance returns and costsPassiveTrying to get average returns rather than do Trying to get average returns rather than do better than the marketbetter than the marketMix of Passive and Active21-2221.5 MONITORING AND REVISING INVESTMENT PORTFOLIOS21-23Monitoring and RevisingBy the time of completion of investment steps,inputs may be out of dateCircumstances can change over timePortfolios will change over timeAsset allocation will change over timeInvesting is a dynamic process