Chapter # 1
Introduction to Investment
Analysis and Portfolio Management
Email/ F.B : nusrat2008noori@yahoo.com
Course Objectives
course objective is;
 To help entrepreneurs and practitioners to understand the
investments field as it is currently understood and practiced for
sound investment decisions making.
 Provide an appreciation of the theory and practice of
investments
 Focus on investment portfolio formation and management
issues
 Emphasize both theoretical and analytical aspects of
investment decisions
 Deal with modern investment theoretical concepts and
instruments.
Upon completion of this course you
will be able:
 To describe and to analyze the investment environment,
different types of investment vehicles;
 To understand and to explain the logic of investment
process and the contents of its’ each stage;
 To use the quantitative methods for investment decision
making – to calculate risk and expected return of various
investment tools and the investment portfolio;
Investment Analysis and Portfolio
Management
 Investment:
putting your money to work for you.
 Analysis:
The process of choosing best source to invest
 Portfolio:
Collection of funds or the collection of
different stocks invested in.
 Management:
Proper handling of funds of investment.
Conti…….
 To distinguish concepts of portfolio theory and
apply its’ principals in the process of investment
portfolio formation;
 To analyze and to evaluate relevance of stocks,
bonds, options for the investments;
 To understand the psychological issues in
investment decision making;
 To know active and passive investment
strategies and to apply them in practice.
Investment Analysis and Portfolio
Management
Definition:
Investment is a conscious act of an individual or any
entity that involves deployment of money (cash) in
securities or assets issued by any financial institution with
a view to obtain the target returns over a specified period
of time.
The person doing so is called investor.
Types of Investors
 There are two types of investors:
1. individual investors
2. Institutional investors
Individual investors are individuals who are investing on
their own. Sometimes individual investors are called retail
investors.
Institutional investors are entities such as investment
companies, commercial banks, insurance companies,
pension funds and other financial institutions.
Categories of Investment
 There are two categories of investing:
1. Direct investment
2. Indirect investment
D.I is the investment in Financial markets.
I.D.I is the investment in financial intermediaries such as
investment companies, commercial banks, insurance
companies, pension funds and other financial institutions.
Direct vs. indirect investment
 The primary difference between these two types of
investing is that applying direct investing investors buy and
sell financial assets and manage individual investment
portfolio themselves.
 Consequently, investing directly through financial markets
investors take all the risk and their successful investing
depends on their understanding of financial markets, its
fluctuations and on their abilities to analyze and to
evaluate the investments and to manage their investment
portfolio.
Direct vs. indirect investment
 Contrary, using indirect type of investing investors are
buying or selling financial instruments of financial
intermediaries (financial institutions) which invest large
pools of funds in the financial markets and hold portfolios.
 As shareholders with the ownership, interest in the
portfolios managed by financial institutions (investment
companies, pension funds, insurance companies,
commercial banks) are entitled to their share of dividends,
interest and capital gains generated and pay their share of
the institution’s expenses and portfolio management fee.
Direct vs. indirect investment
 The risk for investor using indirect investing is related more
with the credibility of chosen institution and the
professionalism of portfolio managers.
 But keep in mind, if a large amount of money is transferred
only to one’s hands, it becomes very risky. There is a well
known American proverb “don't put all your eggs in one
basket” . That turns to the necessity to diversify your
investments.
Types of Investments
Email/ F.B : nusrat2008noori@yahoo.com
Investment Analysis and Portfolio
Management
 Types of investments:
There are five main type of investments:
1. Autonomous Investment
2. Induced Investment
3. Financial Investment
4. Real Investment
5. Planned Investment
Types of Investment
 1. Autonomous Investment
Investment which does not change with the changes in
income level, is called as Autonomous or Government
Investment.
Autonomous Investment remains constant irrespective of
income level. Which means even if the income is low,
Investment remains the same.
It refers to the investment made on houses, roads, public
buildings and other parts of Infrastructure. The Government
normally makes such a type of investment.
Types of Investment
2. Induced Investment
Investment which changes with the changes in the income
level, is called as Induced Investment.
Induced Investment is positively related to the income level.
That is, at high levels of income entrepreneurs are induced
to invest more and vice-versa.
At a high level of income, Consumption expenditure
increases this leads to an increase in investment of capital
goods, in order to produce more consumer goods.
Types of Investment
3. Financial Investment
Investment made in buying financial instruments such as
new shares, bonds, securities, etc. is considered as a
Financial Investment.
However, the money used for purchasing existing financial
instruments such as old bonds, old shares, etc., cannot be
considered as financial investment. It is a mere transfer of a
financial asset from one individual to another.
In financial investment, money invested for buying of new
shares and bonds as well as debentures.
Types of Investment
4. Real Investment
Investment made in new plant and equipment, construction
of public utilities like schools, roads and railways, etc., is
considered as Real Investment.
Real investment is spending money in new machine tools,
plant and equipment, factory buildings, etc.
They increase employment, production and economic growth
of the nation.
Thus real investment has a direct impact on employment
generation, economic growth, etc.
Types of Investment
5. Planned Investment
Investment made with a plan in several sectors of the
economy with specific objectives is called as Planned
or Intended Investment.
Planned Investment can also be called as Intended
Investment because investors while making
investment make a concrete plan of his investment.
Investment in Assets
What is an asset??
 An asset is anything of value that can be converted into
cash. Assets are owned by individuals, businesses and
governments. It may be tangible or intangible .
 Generally we can invest the funds in two type of assets.
1. Financial Assets
2. Real Assets
Assets of Investment
 1. Financial Assets:
Bonds
Stocks
Certificates
Bills
 Notes
Etc….
 2. Real Assets:







Buildings
Plants
Machineries
Plots
Lands
Vehicles
Etc. …
Financial assets Vs. Real assets
 Investment in financial assets differs from investment in
physical assets in those important aspects:
1.
2.
3.
4.
Divisibility
Marketability (or Liquidity)
Holding period
Information availability
Investments Vehicles
Email/ F.B : nusrat2008noori@yahoo.com
Types of Financial Investment Vehicles
 A product used by investors with the intention of having
positive returns.
 The term "investment vehicle" refers to any method by
which individuals or businesses can invest and grow their
money.
 Following the main types of Financial Investment vehicles
are:
1. • Short term investment vehicles;
2. • Fixed-income securities;
3. • Common stock;
4. • Speculative investment vehicles;
5. • Other investment tools.
Types of Financial Investment
Vehicles
1.The main short term investment vehicles are:
 • Certificates of deposit;
 • Treasury bills;
 • Commercial paper;
 • Bankers’ acceptances;
 • Repurchase agreements.
We will discuss them in chapter 4 in details.
Types of Financial Investment Vehicles
2. main fixed income securities are:
 Bonds
 Preferred stocks
3. Common stocks
These will be discussed in chapter
4.
4. Speculative investment vehicles
are:
 • Options;
 • Futures;
They will be discussed in this
chapter.
5. Other investment tools:
 Investment funds;
 Investment life
insurance;
 Pension funds;
 Hedge funds.
We will discuss them in
chapter 2 in details.
Speculative investment vehicles
Speculation is buying the investment vehicles at lower price
and sell them at higher price. The person doing so is called
speculators. (We will talk about its types in chapter 3)
 The only profit the speculator can earn is expected market
price fluctuation.
 Speculative investment vehicle are also called derivative
securities. (Options, Futures,)
 A derivative security is simply a financial instrument whose
value is derived from or depend on another security.
 The derivative itself is merely a contract between two or
more parties.
Options vs. Futures
 An option contract gives the owner of the contract the right,
but not the obligation, to buy or to sell a financial asset at a
specified price from or to another party at any time before
expiry.
 A future contract is an agreement between two parties in
which they agree to transact some financial asset at a
predetermined price at a specified future date. One party
agree to buy the financial asset, the other agrees to sell the
financial asset. It is very important, that in futures contract
case both parties are obligated to perform and neither party
charges the fee.
Investment Analysis and Portfolio
Management
Assignment
What are 3 main and major decisions in Finance?
Importance of studying investment?