SECURITY ANALYSIS AND
PORTFOLIO MANAGEMENT
INTRODUCTION
Main Concepts
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Real assets
Financial assets
Role of financial
markets
Agency problem
Corporate governance
Financial
intermediaries
Investment company
Investment banker
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Pass-through security
Securitization
Primitive security
Derivative security
Money market
Money market
instruments
Bond market
Bond market
instruments
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Types of stock and
bond market indices
Underwriting
Seasoned issue
Private placement
Short sale
Long position
Short position
Primary market
Secondary market
Third market
Fourth market
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Insider trading
Unit investment trust
Managed investment
companies
Hedge funds
Mutual funds
International funds
Index funds
Exchange-traded funds
Real assets
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Land, buildings, equipment
Financial assets
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Claims such as securities to
the income generated by
real assets
Role of financial markets
Agency problem
Risk allocation
 Consumption timing
 Separation of ownership
and management
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Managers, who are hired as
agents of the shareholders,
may pursue their own
interest instead.
Corporate governance
Financial intermediaries
Banks
 Investment companies
 Insurance companies
 Credit unions
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Investment company
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Pool together and manage
the money of many
investors
i.e. mutual funds
Investment banker
Advise the issuing firm on
the prices it can charge for
the securities issued,
market conditions, and
appropriate interest rates.
 i.e. Goldman Sachs
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Pass-through security
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Backed by homogenous
asset pools (i.e. mortgages)
The purchaser receives all
interest and principal
payments.
Securitization
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i.e. Mortgages are treated
like other securities in
financial markets.
Primitive security
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Offers returns based only
on the status of the issuer
◦ Bond-interest payments:
depend on the solvency of the
issuing body.
◦ Dividend payments: depend on
firm’s financial position.
Derivative security
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Yields return that depend
on additional factors
pertaining to the prices of
other assets (i.e. underlying
asset).
Money market
Money market instruments
Maturity: less than one year
 Short-term fixed income
market
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Treasury bill
 Certificate of deposit
 Commercial paper
 Bankers’ acceptances
 Eurodollars
 Repos and reverses
Bond market
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Long-term fixed income
market
Bond market instruments
Treasury notes and bonds
 International bonds
 Municipal bonds
 Corporate bonds
 Mortgage-backed securities
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Types of stock and bond market
indices
Underwriting
Price-weighted index
 Value-weighted index
 Equally-weighted index
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The role of investment
bankers in the IPO process.
Seasoned Issue:
all issues after IPO
Private placement
Short sale
Opposite of public offering
 Selling shares directly to to
a small group of
institutional or wealthy
investors.
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Allows investors to profit
from a decline in a security’s
price.
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The investor borrows a share
of stock from a broker and
sells it.
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The short-seller must
purchase a share of the same
stock in the market to replace
the share that was borrowed
(covering the short position).
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Long position
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Purchase
Short position
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Sell
Primary market
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Where the new issue takes
place.
Secondary market
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Where trading of alreadyissued securities takes
place.
Third market
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Fourth market
Trading of exchange-listed
securities on the over-thecounter market
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Direct trading between
investors in exchange-listed
securities without benefit
of a broker
OTC
No membership requirements for trading
No listing requirements for securities
Insider trading
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Private information held by
officers, directors, or major
stockholders that has not
yet been given to the
public.
Unit investment trust
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Pools of money invested in
a portfolio that is fixed for
the life of the fund.
Managed investment companies
Hedge funds
BoD of the fund (elected by
shareholders) hires a
management company to
manage the portfolio
 Closed-end
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◦ Do not issue shares
◦ Liquidation: shares are sold to
other investors
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Opened-end
◦ Issue shares
◦ Liquidation: shares are sold
back to the fund
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Are not registered as
mutual funds and not
subject to regulatory
authority
Open to only wealthy or
institutional investors
Like mutual funds allow
private investors to pool
assets to be invested by a
fund manager
Mutual funds
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Open-end investment
companies
International funds
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Invest in securities
worldwide
Index funds
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Tries to match the
performance of a broad
market index
Buys shares in securities
included in a particular
index in proportion to each
security’s representation in
that index
Exchange-traded funds
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Allow investors to trade
index portfolios just as they
do shares of stock