Portfolio Analysis Exam Rated A+

Portfolio Analysis Exam Rated A+ Traditional Investments Covers - Security Analysis and Portfolio Management Security Analysis - Involves estimating the merits of individual investments. A three-step process - 1. The analyst considers prospects for the economy, given the stage of the business cycle, 2. The analyst determines which industries are likely to fare well in the forecasted economic conditions, 3. The analyst chooses particular companies within the favored industries. This is an EIC Analysis, top down approach, Economic, Industry, Company. Portfolio Management - Deals with the construction and maintenance of a collection of investments. Portfolio management literature supports the efficient markets paradigm - On a well-developed securities exchange, asset prices accurately reflect the tradeoff between relative risk and potential returns of a security. Efforts to identify undervalued securities are fruitless. Free lunches are difficult to find. Market efficiency and Portfolio management - A properly constructed portfolio achieves a given level of expected return with the least possible risk Six Steps of Portfolio Management - 1. Learn the basic principles of finance, 2. Set portfolio objectives, 3. Formulate an investment strategy, 4. Have a game plan for portfolio revision. Steps 1-4 deal with Evaluate performance, Steps 2-4 deal with protect the portfolio when appropriate. 1. Background, basic principles, and investment policy - A person cannot be an effective portfolio manager without a solid grounding in the basic principles of finance. The two key concepts in finance are: 1. a dollar today is worth more than a dollar tomorrow, 2. a safe dollar is worth more than a risky dollar. These two ideas form the basis of all aspects of financial management. There is no distinction between "good companies" and "good investments". The stock of a well-management company may be too expensive, and the stock of a poorly-run company can be a great investment if it is cheap enough. Other important concepts, the economic concept of utility and return maximization (given a level of risk). Setting objectives: investment policy - it is difficult to accomplish your objectives until you know what they are, terms like growth or income may mean different things to different people. Investment policy - the separation of institutional money managers. A board of directions or investment policy committees established policy. An investment manager implements the policy. 2. Portfolio Construction - Formulate an investment strategy based on the investment policy statement. Portfolio managers must understand the basic elements of capital markets theory - informed diversification, naive diversification, and beta. International investment - emerging markets carry special risk, emerging markets may not be informationally efficient. Stock categories and security analysis - Preferred stock, blue chips, defensive stocks, cyclical stocks, and valuation of stocks.