Essentials-of-Investments--Chapter-021

Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Click to edit Master title style,McGraw-Hill/Irwin, 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,21-,23,Investors and the Investment Process,CHAPTER 21,21.1 INVESTORS AND OBJECTIVES,Overview of the Investment Process,Specify objectives,Identify constraints,Formulate an investment policy,Monitor performance,Reevaluate and modify portfolio as determined from monitoring,Specifying Objectives: Individual Investors,Balance risk and return,Life Cycle is critical to the process of determining the risk/return trade-off,Younger investors,- willing to bear more risk for higher returns,Older investors,- willing to accept lower returns for lower risk,Table 21.1 Amount of Risk Investors Said That They Were Willing to Take by Age,Specifying Objectives: Professional Investors,Personal Trusts,Determined by the individual for whom the funds are being managed,Mutual Funds,Varies with type of fund,Detailed in the prospectus,Specifying Objectives: Professional Investors (cont.),Pension Funds,Defined contribution - shifted to the individual,Defined benefit - depends on average time to retirement of individuals,Endowment Funds,Gifts to nonprofits are invested,Funds from the endowment used by the nonprofit,Specifying Objectives: Insurance Companies,Life Companies,Investments are hedged against potential claims of policy holders,Non-Life Companies,Invest premiums not paid back to policyholders for loss,Hedge against potential claims,Specify Objectives: Banks,Sources of funds: deposits and borrowed funds,Investment of funds: predominately in loans and fixed income securities,Active in the securitized loan and asset markets,Not active in equity except in the Trust Function,21.2 INVESTOR CONSTRAINTS,Investor Constraints,Liquidity,- speed and ease with which asset can be converted into cash,Investment Horizon,- the planned liquidation date,Regulations,- specific regulations that may apply to the investor,Prudent investor rule,Investor Constraints (cont.),Tax Considerations,- special considerations related to tax position of the investor,Unique Needs,- special considerations related to the underlying investors,Table 21.2 Determination of Portfolio Policies,21.3 OBJECTIVES AND CONSTRAINTS OF VARIOUS INVESTORS,Table 21.3 Matrix of Objectives,Table 21.4 Matrix of Constraints,21.4 INVESTMENT POLICIES,Investment Policy: Asset Allocation Decision,Money market assets,Cash equivalents,Fixed-income securities,Primarily bonds,Stocks,Non-U.S. stocks and bonds,Real estate,Precious metals and other commodities,More conservative approach,More weight in bonds and cash equivalents,Top-Down Policy for Institutional Investors,Structured to promote efficiency,Asset universe,Approved list of companies for the asset groups,Figure 21.1 Asset Allocation and Security Selection for Palatial Investments,Investment Policy: Active or Passive,Active,Trying to secure better than average performance,Must balance returns and costs,Passive,Trying to get average returns rather than do better than the market,Mix of Passive and Active,21.5 MONITORING AND REVISING INVESTMENT PORTFOLIOS,Monitoring and Revising,By the time of completion of investment steps, inputs may be out of date,Circumstances can change over time,Portfolios will change over time,Asset allocation will change over time,Investing is a dynamic process,