Investment and Portfolio Management, Study notes of Investment Management and Portfolio Theory

Download Investment and Portfolio Management and more Study notes Investment Management and Portfolio Theory in PDF only on Docsity! I. UNIT TITLE/CHAPTER TITLE: PREPARING TO INVEST II. LESSON TITLE : THE INVESTMENT ENVIRONMENT III. LESSON OVERVIEW This lesson educate the students about investing by saving their excess funds in banks, start a business, or invest either in the money or capital market. Let the students appreciate the concept of earning passive income and encourage them to take active part in the investment industry and make the right choices in investing. IV. LESSON CONTENT INVESTMENT An Investment is simply any asset into which fund can be placed with the expectation that it will generate positive income and/or preserve or increase its value. The reward, or returns, from investing come into two basis forms: income and increased value. Money invested in a savings account provides income in the form of periodic interest payments. A share of common stock also provides income (in the form of dividends), but investors often buy stocks because they expect its price to rise. That is, common stock offers both income and the chance of an increased value. It is a current commitment of $ for a period of time in order to derive future payments that will compensate for: – the time the funds are committed, – the expected rate of inflation, and – uncertainty of future flow of funds. Any asset into which funds can be placed with the expectation that it will generate positive income and/or preserve or increase its value. According to Investopedia the meaning of investment is an asset or item that is purchased with the hope that it will generate income or will appreciate in the future. TYPES OF INVESTMENTS 1. Securities or Property Securities are investments issued by firms, governments, or other organizations that represent a financial claim on the resources of the issuer. Properties are consist of investments in real property or tangible personal property. Real property refers to land, buildings and that which are immovable. Tangible personal property includes items such as gold, artwork, antiques, and other collectibles. 2. Direct or Indirect Investments Direct investment is one in which an investor directly acquires a claim on a security or property and manage individual investment portfolio. An indirect investment is an investment in a collection of securities or properties managed by a professional investor. 3. Debt, Equity, or Derivative Securities Debt is simply a loan that obligates the borrower to make periodic interest payments and to repay the full amount of the loan by some future date. Equity represents on going ownership in a business or property. An equity investment may be held as security or by title to a specific property. Derivative securities are either debt or equity. Instead, they derive their value from an underlying security or asset. 4. Low- or High-Risk Investments Risk reflects the uncertainty surrounding the return that a particular investment will generate. The broader the range of possible values or returns associated with an investment, the greater is its risk. Low-Risk Investments provide a relatively predictable, but also relatively low, return. High-Risk Investment on the other hand provides much higher returns, on average, but they also have the potential for much larger losses. Speculation- offers highly uncertain returns, greater risk, greater returns. The act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain. 5. Short and Long-term investment Short-term Investments typically mature within one year. Short term investment often defined as money-market instruments, because they are traded in the money market which presents the financial market for short term (up to one year of maturity) marketable financial assets. Certificate of deposit is debt instrument issued by bank that indicates a specified sum of money has been deposited at the issuing depository institution. Certificate of deposit bears a maturity date and specified interest rate and can be issued in any denomination. Treasury bills (also called T-bills) are securities representing financial obligations of the government. Treasury bills have maturities of less than one year. Commercial paper is a name for short-term unsecured promissory notes issued by corporation. It is issued either directly from the firm to the investor or through an intermediary and at a discount. Banker ‘s acceptances are short-term fixed-income securities that are created by non- financial firm whose payment is guaranteed by a bank. Repurchase agreement (often referred to as a repo) is the sale of security with a commitment by the seller to buy the security back from the purchaser at a specified price at a designated future date.