V-601-EIGN Asset Management Introduction of the course th January 10 2023 Introduction of the course • Instructors for the lectures - Svandís Rún Ríkarðsdóttir; email svandisr@ru.is - Guðrún Inga Ingólfsdóttir; email gudrunii@ru.is • Teaching Assistant for the problem-solving sessions - Hlynur Logi Ingólfsson; email hlynuri20@ru.is • There are two sessions each week - Lectures on Tuesdays from 8.30 to 11.50 - Problem-solving sessions on Thursdays from 16.00 to 17.40 • Starting in week 2 of the semester Objective of the course • The goal of asset management is to maximize the value of an investment portfolio over time while maintaining an acceptable level of risk. • The primary objective of the course is to study the field of asset management through theory and emperical evidence relevant for investing and managing portfolios. • Major topics include different schools on investing; securities markets and investment funds; optimal portfolio selection; CAPM and factor models; market efficiency; risk and return. • Upon completion of the course students should have knowledge of what Asset Management is, different investment funds and management strategies, Modern Portfolio Theory and optimal portfolio selection. Students should have a good view of the subjects of asset managers as well as knowing the background of the field and application of theory and models. Reading material The main reading material is the textbook Investments by Bodie, Z., A. Kane and A.J. Marcus, McGraw-Hill, 12th edition. - Available as an e-book at Heimkaup https://www.heimkaup.is/investments • Many more interesting books, articles and websites are on the subject and related to asset management. - Examples of that are two Icelandic books by Sigurður B. Stefánsson and Svandís R. Ríkarðsdóttir: • Lesið í markaðinn and Hlutabréf á heimsmarkaði • Additional readings will be referenced and may be assigned during the course and relevant and useful websites will be introduced. Course requirements and grading • The final grade for the course will be calculated with the following weights: Group problem sets 15% Midterm 20% Group project 25% Final exam 40% st • The midterm will be a multiple choice exam during a lecture on February 21 . • Detailed information about the group project and final exam will be announced later in the course. Group Problem Sets • Five Group problem sets will be assigned and are to be done in groups of up to five students. • Students are expected to be in the same group during the course, both working on the Group problem sets as well as the Group project. • It is recommended that students attend and use the problem solving sessions to work on the Group Problem Sets as well as other practice problems to be covered in the sessions. • Each problem set that is completed and turned in on time gets the group full credit, that is 1/5 of the 15% weighting, even if not all the answers are correct. Important dates Teaching schedule Teaching schedule BKM chapter 1 The Investment Environment Real vs Financial Assets Real Assets Financial Assets • Have Productive Capacity • Claims on real assets • Examples; - Land - Buildings - Machines - Intellectual Property - Patents • Do no contribute directly to productive capacity • Examples; - Cash Stocks Bonds Derivatives Financial Assets Financial Assets: Claims on Real Assets Fixed Income Securities: Promises a fixed stream of income or a stream of income determined by a specified formula; debt Equity: Represents ownership share in a corporation; common stock Derivatives: Provide payoffs that are determined by the prices of other (underlying) assets Financial Markets What purpose do financial markets serve? • The simplest, and most important, purpose of financial markets is to match the needs of those who have excess funds (investors) and those in need of capital (issuers) • In Iceland, the biggest supplier of capital in the financial markets are the pension funds (the households) while the biggest issuer is the government (government bonds) Financial Markets What purpose do financial markets serve? • The Informational Role - Capital flows to companies with best prospects at the time • Consumption Timing - Use securities to store wealth and transfer consumption to the future • Allocation of Risk - Investors can choose securities matching their taste for risk The Investment Process • A portfolio is the collection of investment assets • Asset allocation is how the portfolio is divided between asset classes • Asset classes are the different types of assets available, such as - Fixed income Equity Derivatives Real assets • Security selection is the choice of securities within each asset class The Investment Process • Two types of portfolio construction; • Top-down approach - Asset allocation is determined from the start before securities are selected to fit the asset allocation • Bottom-up approach - Securities are selected based on some criteria and asset allocation is simply a result from security selection The Players • Investors: Investment managers, Pension funds, Insurance companies, Individuals • Financial Intermediaries: Banks, Investment banks, Brokers, Financial Advisors, Investment funds • Issuers: Companies, Banks, Governments, Municipalities Next week Asset Management as a professional field. Historical returns on asset classes. Risk and reward of stocks and bonds.