INVESTMENT ANALYSIS & PORTFOLIO MANAGEMENT

MODULE

DR T. CHINODA
2020
CHAPTER 1: THE INVESTMENT ENVIRONMENT

Objectives of the Chapter

At the end of the chapter, students should be able
to:
 Define the "investment environment“
 Distinguish between real assets and financial
assets,
 Distinguish between the money market and the
capital market
 Describe the instruments traded in each of them,
• Describe the participants in the financial
markets, and discuss their roles.
.
 1.2. Real assets versus financial assets.
An investment -is the current commitment of dollars in
order to derive future payments.
When you invest your funds you expect compensation for
the following three reasons.

 The time value of money.

 The expected rate of inflation.
 The uncertainty of future payments.

When you invest, you need an investment vehicle, known

as an asset.
Distinction between Real Assets and Financial Assets
• Real assets determine the productive capacity of the firm,
and therefore the economy as a whole.
• Real assets are the physical assets of the firm, such as
land, buildings, plant and machinery that are used to
generate income.
• Financial assets-are securities, or certificates, that are
issued by firms/government to raise funds from the
investing public.
• They do not contribute directly to the productive capacity
of the firm.
• Examples of financial assets include bonds and shares.
Securities facilitate the transfer of funds from investors to
firms.
 1.3. The money market versus the capital market.
The money market
Instruments traded have the following characteristics:
 Short-term
 Low risk ( risk-free )
 Marketable.
 Highly liquid.
 Only debt securities are traded on the money market. Eg.Treasury
Bills (T-bills), Certificates of Deposit, Commercial Paper, Bankers'
Acceptances, and Repurchase Agreements (Repos).

The Capital Market.

 Is a market for long-term securities.
 Both equity (shares) and debt (bonds) instruments are traded on
this market. Bonds are also known as fixed-income securities.
The Derivative Market.
• Derivatives, such as options and futures,
provide pay-offs that depend on the values of
other assets such as commodity prices, bond
and stock prices, or market index values.
• Thus, their value is derived from the values of
the underlying asset. They represent contingent
claims that is their values are contingent on the
values of other assets.
• Derivatives are commonly used hedging against
risk with regards to other securities.
 Financial markets participants.

Households
• is interested in both real and financial assets. The investment
preferences is determined by current tax bracket and attitude
to risk
Businesses
• issue securities to the investing public to raise funds from the
market.
• The funds are then used to buy real assets.
The government.
• requires funds to finance its expenditures through borrowing
from the public.
• Because of the low risk associated with government
securities, the government can issue its securities at very low
cost to itself.
CHAPTER 2: SECURITIES TRADING