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1、Lecture Presentation Software to accompanyInvestment Analysis and Portfolio ManagementSeventh EditionChapter 1The Investment SettingQuestions to be answered:Why do individuals invest?What is an investment?How do we measure the rate of return on an investment?How do investors measure risk related to

2、alternative investments?Chapter 1The Investment SettingWhat factors contribute to the rates of return that investors require on alternative investments?What macroeconomic and microeconomic factors contribute to changes in the required rate of return for individual investments and investments in gene

3、ral?Why Do Individuals Invest?Bysavingmoney(insteadofspendingit),individualstradeoffpresentconsumptionforalargerfutureconsumption.How Do We Measure The Rate Of Return On An Investment?Thepurerateofinterestistheexchangeratebetweenfutureconsumptionandpresentconsumption.Marketforcesdeterminethisrate.Pe

4、opleswillingnesstopaythedifferenceforborrowingtodayandtheirdesiretoreceiveasurplusontheirsavingsgiverisetoaninterestratereferredtoasthepuretimevalueofmoney.How Do We Measure The Rate Of Return On An Investment?Ifthefuturepaymentwillbediminishedinvaluebecauseofinflation,thentheinvestorwilldemandanint

5、erestratehigherthanthepuretimevalueofmoneytoalsocovertheexpectedinflationexpense.How Do We Measure The Rate Of Return On An Investment?Ifthefuturepaymentfromtheinvestmentisnotcertain,theinvestorwilldemandaninterestratethatexceedsthepuretimevalueofmoneyplustheinflationratetoprovideariskpremiumtocover

6、theinvestmentrisk.How Do We Measure The Rate Of Return On An Investment?Defining an InvestmentAcurrentcommitmentof$foraperiodoftimeinordertoderivefuturepaymentsthatwillcompensatefor:the time the funds are committedthe expected rate of inflationuncertainty of future flow of funds.MeasuresofHistorical

7、RatesofReturnHoldingPeriodReturn1.1MeasuresofHistoricalRatesofReturnHoldingPeriodYieldHPY=HPR-11.10-1=0.10=10%1.2AnnualHoldingPeriodReturnAnnualHPR=HPR1/nwheren=numberofyearsinvestmentisheldAnnualHoldingPeriodYieldAnnualHPY=AnnualHPR-1MeasuresofHistoricalRatesofReturnMeasuresofHistoricalRatesofRetur

8、nArithmeticMean1.4MeasuresofHistoricalRatesofReturnGeometricMean1.5APortfolioofInvestmentsThemeanhistoricalrateofreturnfor a portfolio of investments ismeasuredastheweightedaverageof the HPYs for the individualinvestmentsintheportfolio.ComputationofHoldingPeriodYieldforaPortfolioExhibit 1.1ExpectedR

9、atesofReturnRiskisuncertaintythataninvestmentwillearnitsexpectedrateofreturnProbabilityisthelikelihoodofanoutcomeExpectedRatesofReturn1.6RiskAversionTheassumptionthatmostinvestorswillchoosetheleastriskyalternative,allelsebeingequalandthattheywillnotacceptadditionalriskunlesstheyarecompensatedinthefo

10、rmofhigherreturnProbabilityDistributionsRisk-freeInvestmentExhibit 1.2ProbabilityDistributionsRiskyInvestmentwith3PossibleReturnsExhibit 1.3ProbabilityDistributionsRisky investment with ten possible rates of returnExhibit 1.4MeasuringtheRiskofExpectedRatesofReturn1.7MeasuringtheRiskofExpectedRatesof

11、ReturnStandardDeviationisthesquarerootofthevariance1.8MeasuringtheRiskofExpectedRatesofReturnCoefficientofvariation(CV)ameasureofrelativevariabilitythatindicatesriskperunitofreturnStandard Deviation of ReturnsExpected Rate of Returns1.9MeasuringtheRiskofHistoricalRatesofReturnvarianceoftheserieshold

12、ingperiodyieldduringperiodIexpectedvalueoftheHPYthatisequaltothearithmeticmeanoftheseriesthenumberofobservations1.10DeterminantsofRequiredRatesofReturnTimevalueofmoneyExpectedrateofinflationRiskinvolvedTheRealRiskFreeRate(RRFR)Assumesnoinflation.Assumesnouncertaintyaboutfuturecashflows.Influencedbyt

13、imepreferenceforconsumptionofincomeandinvestmentopportunitiesintheeconomyAdjustingForInflationReal RFR=1.12NominalRisk-FreeRateDependentuponConditionsintheCapitalMarketsExpectedRateofInflationAdjustingForInflationNominal RFR=(1+RealRFR)x(1+ExpectedRateofInflation)-11.11FacetsofFundamentalRiskBusines

14、sriskFinancialriskLiquidityriskExchangerateriskCountryriskBusinessRiskUncertaintyofincomeflowscausedbythenatureofafirmsbusinessSalesvolatilityandoperatingleveragedeterminethelevelofbusinessrisk.FinancialRiskUncertaintycausedbytheuseofdebtfinancing.Borrowingrequiresfixedpaymentswhichmustbepaidaheadof

15、paymentstostockholders.Theuseofdebtincreasesuncertaintyofstockholderincomeandcausesanincreaseinthestocksriskpremium.LiquidityRiskUncertaintyisintroducedbythesecondarymarketforaninvestment.Howlongwillittaketoconvertaninvestmentintocash?Howcertainisthepricethatwillbereceived?ExchangeRateRiskUncertaint

16、yofreturnisintroducedbyacquiringsecuritiesdenominatedinacurrencydifferentfromthatoftheinvestor.Changesinexchangeratesaffecttheinvestorsreturnwhenconvertinganinvestmentbackintothe“home”currency.CountryRiskPoliticalriskistheuncertaintyofreturnscausedbythepossibilityofamajorchangeinthepoliticaloreconom

17、icenvironmentinacountry.Individualswhoinvestincountriesthathaveunstablepolitical-economicsystemsmustincludeacountryrisk-premiumwhendeterminingtheirrequiredrateofreturnRiskPremiumf(BusinessRisk,FinancialRisk,LiquidityRisk,ExchangeRateRisk,CountryRisk)orf(SystematicMarketRisk)RiskPremiumandPortfolioTh

18、eoryTherelevantriskmeasureforanindividualassetisitsco-movementwiththemarketportfolioSystematicriskrelatesthevarianceoftheinvestmenttothevarianceofthemarketBetameasuresthissystematicriskofanassetFundamentalRiskversusSystematicRiskFundamentalriskcomprisesbusinessrisk,financialrisk,liquidityrisk,exchan

19、geraterisk,andcountryriskSystematicriskreferstotheportionofanindividualassetstotalvarianceattributabletothevariabilityofthetotalmarketportfolioRelationshipBetweenRiskandReturnExhibit 1.7(Expected)ChangesintheRequiredRateofReturnDuetoMovementsAlongtheSMLExhibit 1.8ChangesintheSlopeoftheSMLRPi=E(Ri)-N

20、RFRwhere:RPi=riskpremiumforassetiE(Ri)=theexpectedreturnforasset iNRFR=thenominalreturnonarisk-freeasset1.13MarketPortfolioRiskThemarketriskpremiumforthemarketportfolio(containsalltheriskyassetsinthemarket)canbecomputed:RPm=E(Rm)-NRFRwhere:RPm=riskpremiumonthemarketportfolioE(Rm)=expectedreturnonthe

21、marketportfolioNRFR=expectedreturnonarisk-freeasset1.14ChangeinMarketRiskPremiumExhibit 1.10NRFRExpected ReturnRmRmCapitalMarketConditions,ExpectedInflation,andtheSMLExhibit 1.11NRFRNRFRExpected ReturnTheInternetInvestments Owww.cob.ohio-state.edu/dept/fin/FutureTopicsChapter2Theassetallocationdecis

22、ionTheindividualinvestorlifecycleRisktolerancePortfoliomanagementLecture Presentation Software to accompanyInvestment Analysis and Portfolio ManagementSeventh Editionby Frank K.Reilly&Keith C.BrownChapter 2Chapter 2The Asset Allocation DecisionQuestions to be answered:What is asset allocation?What a

23、re the four steps in the portfolio management process?What is the role of asset allocation in investment planning?Why is a policy statement important to the planning process?Chapter 2The Asset Allocation DecisionWhat objectives and constraints should be detailed in a policy statement?How and why do

24、investment goals change over a persons lifetime and circumstances?Why do asset allocation strategies differ across national boundaries?Financial Plan PreliminariesInsuranceLifeinsuranceTermlifeinsurance-Providesdeathbenefitonly.PremiumcouldchangeeveryrenewalperiodUniversalandvariablelifeinsurancepro

25、videcashvalueplusdeathbenefitFinancial Plan PreliminariesInsuranceHealthinsuranceDisabilityinsuranceAutomobileinsuranceHome/rentalinsuranceLiabilityinsuranceFinancial Plan PreliminariesCashreserveTomeetemergencyneedsIncludescashequivalents(liquidinvestments)Equaltosixmonthslivingexpensesrecommendedb

26、yexpertsIndividual InvestorLife CycleAccumulationphaseearlytomiddleyearsofworkingcareerConsolidationphasepastmidpointofcareers.EarningsgreaterthanexpensesSpending/GiftingphasebeginsafterretirementIndividual Investor Life CycleNet WorthAgeAccumulation PhaseLong-term:Retirement Childrens college Short

27、-term:House CarConsolidation PhaseLong-term:RetirementShort-term:VacationsChildrens CollegeSpending Phase Gifting PhaseLong-term:Estate PlanningShort-term:Lifestyle Needs Gifts Exhibit 2.1Life Cycle Investment GoalsNear-term,high-prioritygoalsLong-term,high-prioritygoalsLower-prioritygoalsThe Portfo

28、lio Management Process1.Policystatement-Focus:Investorsshort-termandlong-termneeds,familiaritywithcapitalmarkethistory,andexpectations2.Examinecurrentandprojectfinancial,economic,political,andsocialconditions-Focus:Short-termandintermediate-termexpectedconditionstouseinconstructingaspecificportfolio

29、3.Implementtheplanbyconstructingtheportfolio-Focus:Meettheinvestorsneedsattheminimumrisklevels4.Feedbackloop:Monitorandupdateinvestorneeds,environmentalconditions,portfolioperformanceExhibit 2.2The Portfolio Management Process1.Policystatementspecifiesinvestmentgoalsandacceptablerisklevelsshouldbere

30、viewedperiodicallyguidesallinvestmentdecisionsThe Portfolio Management Process2.StudycurrentfinancialandeconomicconditionsandforecastfuturetrendsdeterminestrategiestomeetgoalsrequiresmonitoringandupdatingThe Portfolio Management Process3.Constructtheportfolioallocateavailablefundstominimizeinvestors

31、risksandmeetinvestmentgoalsThe Portfolio Management Process4.MonitorandupdateevaluateportfolioperformanceMonitorinvestorsneedsandmarketconditionsrevisepolicystatementasneededmodifyinvestmentstrategyaccordinglyThe Need For A Policy StatementHelps investors understand their ownneeds,objectives,andinve

32、stmentconstraintsSetsstandardsforevaluatingportfolioperformanceReducesthepossibilityofinappropriatebehavioronthepartoftheportfoliomanagerConstructing A Policy StatementQuestions to be answered:Whataretherealrisksofanadversefinancialoutcome,especiallyintheshortrun?WhatprobableemotionalreactionswillIh

33、avetoanadversefinancialoutcome?HowknowledgeableamIaboutinvestmentsandthefinancialmarkets?Constructing A Policy StatementWhatothercapitalorincomesourcesdoIhave?Howimportantisthisparticularportfoliotomyoverallfinancialposition?What,ifany,legalrestrictionsmayaffectmyinvestmentneeds?What,ifany,unanticip

34、atedconsequencesofinterimfluctuationsinportfoliovaluemightaffectmyinvestmentpolicy?Investment ObjectivesRiskToleranceAbsoluteorrelativepercentagereturnGeneralgoalsInvestment ObjectivesGeneral GoalsCapitalpreservationminimizeriskofreallossCapitalappreciationGrowthoftheportfolioinrealtermstomeetfuture

35、needCurrentincomeFocusisingeneratingincomeratherthancapitalgainsInvestment ObjectivesGeneral GoalsTotalreturnIncreaseportfoliovaluebycapitalgainsandbyreinvestingcurrentincomeMaintainmoderateriskexposureInvestment ConstraintsLiquidityneedsVarybetweeninvestorsdependinguponage,employment,taxstatus,etc.

36、TimehorizonInfluencesliquidityneedsandrisktoleranceInvestment ConstraintsTax concernsCapitalgainsorlossestaxeddifferentlyfromincomeUnrealizedcapitalgainreflectpriceappreciationofcurrentlyheldassetsthathavenotyetbeensoldRealizedcapitalgainwhentheassethasbeensoldataprofitTrade-offbetweentaxesanddivers

37、ificationtaxconsequencesofsellingcompanystockfordiversificationpurposesInvestment ConstraintsTaxconcerns(continued)interestonmunicipalbondsexemptfromfederalincometaxandfromstateofissueinterestonfederalsecuritiesexemptfromstateincometaxcontributionstoanIRAmayqualifyasdeductiblefromtaxableincometaxdef

38、erralconsiderations-compoundingEquivalent Taxable YieldEffect of Tax Deferral on Investor Wealth over Time$1,000Investment ValueTime$10,062.66$5,365.91Exhibit 2.6Methods of Tax DeferralRegularIRA-taxdeductibleTaxonreturnsdeferreduntilwithdrawalRothIRA-nottaxdeductibletax-freewithdrawalspossibleCashv

39、aluelifeinsurancefundsaccumulatetax-freeuntiltheyarewithdrawnTaxShelteredAnnuitiesEmployers401(k)and403(b)planstax-deferredinvestmentsLegal and Regulatory FactorsLimitationsorpenaltiesonwithdrawalsFiduciaryresponsibilities-“prudentman”ruleInvestmentlawsprohibitinsidertradingUnique Needs and Preferen

40、cesPersonalpreferencessuchassociallyconsciousinvestmentscouldinfluenceinvestmentchoiceTimeconstraintsorlackofexpertiseformanagingtheportfoliomayrequireprofessionalmanagementLargeinvestmentinemployersstockmayrequireconsiderationofdiversificationneedsInstitutionalinvestorsneedsConstructing the Policy

41、StatementObjectives-riskandreturnConstraints-liquidity,timehorizon,taxfactors,legalandregulatoryconstraints,anduniqueneedsandpreferencesDevelopingaplandependsonunderstandingtherelationshipbetweenriskandreturnandthetheimportanceofdiversificationThe Importance of Asset AllocationAninvestmentstrategyis

42、basedonfourdecisionsWhatassetclassestoconsiderforinvestmentWhatnormalorpolicyweightstoassigntoeacheligibleclassDeterminingtheallowableallocationrangesbasedonpolicyweightsWhatspecificsecuritiestopurchasefortheportfolioThe Importance of Asset AllocationAccordingtoresearchstudies,most(85%to95%)oftheove

43、rallinvestmentreturnisduetothefirsttwodecisions,nottheselectionofindividualinvestmentsReturns and Risk of Different Asset ClassesHistorically,smallcompanystockshavegeneratedthehighestreturns.ButthevolatilityofreturnshavebeenthehighesttooInflationandtaxeshaveamajorimpactonreturnsReturnsonTreasuryBill

44、shavebarelykeptpacewithinflationReturns and Risk of Different Asset ClassesMeasuringriskbyprobabilityofnotmeetingyourinvestmentreturnobjectiveindicatesriskofequitiesissmallandthatofT-billsislargebecauseoftheirdifferencesinexpectedreturnsFocusingonlyonreturnvariabilityasameasureofriskignoresreinvestm

45、entriskAsset Allocation SummaryPolicystatementdeterminestypesofassetstoincludeinportfolioAssetallocationdeterminesportfolioreturnmorethanstockselectionOverlongtimeperiods,sizableallocationtoequitywillimproveresultsRiskofastrategydependsontheinvestorsgoalsandtimehorizonAsset Allocation and Cultural D

46、ifferencesSocial,political,andtaxenvironmentsinfluencetheassetallocationdecisionEquityallocationsofU.S.pensionfundsaverage58%IntheUnitedKingdom,equitiesmakeup78%ofassetsInGermany,equityallocationaverages8%InJapan,equitiesare37%ofassetsSummaryIdentifyinvestmentneeds,risktolerance,andfamiliaritywithca

47、pitalmarketsIdentifyobjectivesandconstraintsEnhanceinvestmentplansbyaccurateformulationofapolicystatementFocusonassetallocationasitdetermineslong-termreturnsandriskTheInternetInvestments O and Constraints of Institutional InvestorsMutual Fundspoolinvestorsfundsandinvests them in financial assets as

48、per itsinvestmentobjectivePensionFundsReceive contributions from the firm,itsemployees,orbothandinveststhosefundsDefined BenefitpromisetopayretireesaspecificincomestreamafterretirementDefined Contributiondonotpromiseaset of benefits.Employees retirementincomeisnotanobligationofthefirmEndowmentFundsT

49、hey represent contributions made tocharitableoreducationalinstitutionsInsuranceCompaniesLife Insurance CompaniesearnrateinexcessofactuarialrategrowingsurplusifthespreadispositivefiduciaryprincipleslimittherisktoleranceliquidityneedshaveincreasedtaxrulechangesInsuranceCompaniesNonlife Insurance Compa

50、niescashflowslesspredictablefiduciaryresponsibilitytoclaimantsRiskexposurelowtomoderateliquidityconcernsduetouncertainclaimpatternsregulationmorepermissiveBanksMustattractfundsinacompetitiveinterestrateenvironmentTrytomaintainapositivedifferencebetweentheircostoffundsandtheirreturnonassetsNeedsubsta