PORTFOLIO AND INVESTMENT ANALYSIS
PORTFOLIO AND INVESTMENT ANALYSIS
1
, PORTFOLIO AND INVESTMENT ANALYSIS
TABLE OF CONTENTS
Contents
COURSE OUTLINE:.....................................................................
Table of Contents
TABLE OF CONTENTS .................................................................................................................................... 3
1.0 LECTURE 1: INTRODUCTION TO PORTFOLIO AND INVESTMENTS ANALYSIS..................... 9
1.1 Introduction .............................................................................................................................................. 9
1.2 Lecture objectives .................................................................................................................................... 9
1.3 Lecture outline ......................................................................................................................................... 9
1.3.1 Portfolio ................................................................................................................................................... 9
Investment Time Frame (Horizon) .................................................................................................................... 10
Investment Objectives: ...................................................................................................................................... 10
1.3.2 Investment concepts ............................................................................................................................ 10
1.3.2.1Investing ................................................................................................................................................. 10
1.3.2.2Types of investing .................................................................................................................................. 11
1.3.2.3Types of investors .................................................................................................................................. 11
1.4 End of lecture activities .......................................................................................................................... 11
1.5 Summary ................................................................................................................................................ 12
2.0 LECTURE 2: INVESTMENT ENVIRONMENT AND INVESTMENT MANAGEMENT PROCESS
................................................................................................................................................................ 13
2.1 Introduction ............................................................................................................................................ 13
2.2 Lecture objectives .................................................................................................................................. 13
2.3 Lecture outline ....................................................................................................................................... 13
2.3.1 Investment environment/climate ....................................................................................................... 13
2.3.2 Types of investment vehicles/Avenues .............................................................................................. 14
2.3.3 Investment attributes ........................................................................................................................... 14
COMPARISON OF INVESTMENT AVENUES ............................................................................................ 16
2.3.4 Investment decision making ................................................................................................................ 17
3
, PORTFOLIO AND INVESTMENT ANALYSIS
2.3.5 Investment management process ....................................................................................................... 19
1. Setting of investment policy................................................................................................................... 19
2. Analysis and evaluation of investment vehicles..................................................................................... 19
3. Formation of diversified investment portfolio ....................................................................................... 20
4. Measurement and evaluation of portfolio performance. ........................................................................ 20
5. Portfolio revision. ................................................................................................................................... 20
2.3 End of lecture activities .......................................................................................................................... 21
2.4 Summary ................................................................................................................................................ 21
3.0 LECTURE 3: FINANCIAL MARKETS ............................................................................................... 22
3.1 Introduction ............................................................................................................................................ 22
3.2 Lecture objectives .................................................................................................................................. 22
3.3 Lecture outline ....................................................................................................................................... 22
3.3.1 Economic functions of a financial market .......................................................................................... 22
3.3.2 Classifications of financial markets ..................................................................................................... 22
Sequence of transactions for selling and buying securities ............................................................................... 23
a) Primary market ....................................................................................................................................... 23
b) Secondary market ................................................................................................................................... 23
Types of secondary market places: ................................................................................................................... 23
Term of circulation of financial assets traded in the market ............................................................................. 24
Economic nature of securities, traded in the market ......................................................................................... 24
3.3.3 Efficient market hypothesis (EMH)..................................................................................................... 25
Forms of efficient market hypothesis ................................................................................................................ 25
3.4 End of lecture activities .......................................................................................................................... 26
3.5 Summary ................................................................................................................................................ 26
4.0 LECTURE 4: PORTFOLIO THEORY ................................................................................................. 27
4.1 Introduction ............................................................................................................................................ 27
4.2 Lecture objectives .................................................................................................................................. 27
4.3 Lecture outline ....................................................................................................................................... 27
4.3.1 Business risk ......................................................................................................................................... 27
4.3.2 Factors influencing the efficiency of a portfolio ................................................................................. 29
4
, PORTFOLIO AND INVESTMENT ANALYSIS
1. Number of securities forming a portfolio: .............................................................................................. 29
4.3.3 Principles of portfolio theory............................................................................................................... 30
4.3.4 Limitations of portfolio theory ............................................................................................................ 31
4.4 End of lecture activities .......................................................................................................................... 31
4.5 Summary ................................................................................................................................................ 31
5.0 LECTURE 5: QUANTITATIVE METHODS OF INVESTMENT ANALYSIS ................................ 32
5.1 Introduction ............................................................................................................................................ 32
5.2 Lecture objectives .................................................................................................................................. 32
5.3 Lecture outline ....................................................................................................................................... 32
5.3.1 Measures of individual investment return and risk........................................................................... 32
Expected Return R .......................................................................................................................................... 33
Risk of an Individual Security or Investment .................................................................................................... 33
5.3.2 Measures of portfolio return and risk ................................................................................................. 34
Two Assets Case: .............................................................................................................................................. 34
Portfolio Risk: ................................................................................................................................................... 34
Two Assets Case: .............................................................................................................................................. 34
Co-variance between A and B:.......................................................................................................................... 34
Coefficient of correlation between A and B ..................................................................................................... 35
Standard Deviation ............................................................................................................................................ 35
Coefficient of variation ..................................................................................................................................... 36
Illustrations Question one .................................................................................................................................. 36
Solution: ............................................................................................................................................................ 36
Interpretation: .................................................................................................................................................... 38
2
Coefficient of Determination ( ................................................................................................................ 38
QUESTION TWO............................................................................................................................................. 38
Required: ........................................................................................................................................................... 39
Solution: ............................................................................................................................................................ 39
5.4 End of lecture activity ............................................................................................................................ 41
5.5 Summary ................................................................................................................................................ 41
5
PORTFOLIO AND INVESTMENT ANALYSIS
1
, PORTFOLIO AND INVESTMENT ANALYSIS
TABLE OF CONTENTS
Contents
COURSE OUTLINE:.....................................................................
Table of Contents
TABLE OF CONTENTS .................................................................................................................................... 3
1.0 LECTURE 1: INTRODUCTION TO PORTFOLIO AND INVESTMENTS ANALYSIS..................... 9
1.1 Introduction .............................................................................................................................................. 9
1.2 Lecture objectives .................................................................................................................................... 9
1.3 Lecture outline ......................................................................................................................................... 9
1.3.1 Portfolio ................................................................................................................................................... 9
Investment Time Frame (Horizon) .................................................................................................................... 10
Investment Objectives: ...................................................................................................................................... 10
1.3.2 Investment concepts ............................................................................................................................ 10
1.3.2.1Investing ................................................................................................................................................. 10
1.3.2.2Types of investing .................................................................................................................................. 11
1.3.2.3Types of investors .................................................................................................................................. 11
1.4 End of lecture activities .......................................................................................................................... 11
1.5 Summary ................................................................................................................................................ 12
2.0 LECTURE 2: INVESTMENT ENVIRONMENT AND INVESTMENT MANAGEMENT PROCESS
................................................................................................................................................................ 13
2.1 Introduction ............................................................................................................................................ 13
2.2 Lecture objectives .................................................................................................................................. 13
2.3 Lecture outline ....................................................................................................................................... 13
2.3.1 Investment environment/climate ....................................................................................................... 13
2.3.2 Types of investment vehicles/Avenues .............................................................................................. 14
2.3.3 Investment attributes ........................................................................................................................... 14
COMPARISON OF INVESTMENT AVENUES ............................................................................................ 16
2.3.4 Investment decision making ................................................................................................................ 17
3
, PORTFOLIO AND INVESTMENT ANALYSIS
2.3.5 Investment management process ....................................................................................................... 19
1. Setting of investment policy................................................................................................................... 19
2. Analysis and evaluation of investment vehicles..................................................................................... 19
3. Formation of diversified investment portfolio ....................................................................................... 20
4. Measurement and evaluation of portfolio performance. ........................................................................ 20
5. Portfolio revision. ................................................................................................................................... 20
2.3 End of lecture activities .......................................................................................................................... 21
2.4 Summary ................................................................................................................................................ 21
3.0 LECTURE 3: FINANCIAL MARKETS ............................................................................................... 22
3.1 Introduction ............................................................................................................................................ 22
3.2 Lecture objectives .................................................................................................................................. 22
3.3 Lecture outline ....................................................................................................................................... 22
3.3.1 Economic functions of a financial market .......................................................................................... 22
3.3.2 Classifications of financial markets ..................................................................................................... 22
Sequence of transactions for selling and buying securities ............................................................................... 23
a) Primary market ....................................................................................................................................... 23
b) Secondary market ................................................................................................................................... 23
Types of secondary market places: ................................................................................................................... 23
Term of circulation of financial assets traded in the market ............................................................................. 24
Economic nature of securities, traded in the market ......................................................................................... 24
3.3.3 Efficient market hypothesis (EMH)..................................................................................................... 25
Forms of efficient market hypothesis ................................................................................................................ 25
3.4 End of lecture activities .......................................................................................................................... 26
3.5 Summary ................................................................................................................................................ 26
4.0 LECTURE 4: PORTFOLIO THEORY ................................................................................................. 27
4.1 Introduction ............................................................................................................................................ 27
4.2 Lecture objectives .................................................................................................................................. 27
4.3 Lecture outline ....................................................................................................................................... 27
4.3.1 Business risk ......................................................................................................................................... 27
4.3.2 Factors influencing the efficiency of a portfolio ................................................................................. 29
4
, PORTFOLIO AND INVESTMENT ANALYSIS
1. Number of securities forming a portfolio: .............................................................................................. 29
4.3.3 Principles of portfolio theory............................................................................................................... 30
4.3.4 Limitations of portfolio theory ............................................................................................................ 31
4.4 End of lecture activities .......................................................................................................................... 31
4.5 Summary ................................................................................................................................................ 31
5.0 LECTURE 5: QUANTITATIVE METHODS OF INVESTMENT ANALYSIS ................................ 32
5.1 Introduction ............................................................................................................................................ 32
5.2 Lecture objectives .................................................................................................................................. 32
5.3 Lecture outline ....................................................................................................................................... 32
5.3.1 Measures of individual investment return and risk........................................................................... 32
Expected Return R .......................................................................................................................................... 33
Risk of an Individual Security or Investment .................................................................................................... 33
5.3.2 Measures of portfolio return and risk ................................................................................................. 34
Two Assets Case: .............................................................................................................................................. 34
Portfolio Risk: ................................................................................................................................................... 34
Two Assets Case: .............................................................................................................................................. 34
Co-variance between A and B:.......................................................................................................................... 34
Coefficient of correlation between A and B ..................................................................................................... 35
Standard Deviation ............................................................................................................................................ 35
Coefficient of variation ..................................................................................................................................... 36
Illustrations Question one .................................................................................................................................. 36
Solution: ............................................................................................................................................................ 36
Interpretation: .................................................................................................................................................... 38
2
Coefficient of Determination ( ................................................................................................................ 38
QUESTION TWO............................................................................................................................................. 38
Required: ........................................................................................................................................................... 39
Solution: ............................................................................................................................................................ 39
5.4 End of lecture activity ............................................................................................................................ 41
5.5 Summary ................................................................................................................................................ 41
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