LECTURE 7

Lecture 2. Investment and Portfolio Management

Steps in InvestingStep 1. Meeting Investment Prerequisites. This category includes funds for housing, food, transportation, taxes, and clothing. In addition, a pool of easily accessible funds should be established for meeting emergency cash needs. Another prerequisite is adequate protection against the losses that could result from death, illness or disability, damage to property, or a negligent act.Step 2. Establishing Investment Goals. Investment goals are the financial objectives you wish to achieve by investing. Common investment goals include:a. Accumulating Retirement Fundsb. Enhancing Current Incomec. Saving for Major Expendituresd. Sheltering Income from TaxesStep 3. Adopting an Investment Plan. An investment plan is a written document describing how funds will be invested. A series of supporting investment goals can be developed for each long-term goal. For each goal, specify the target date for achieving it and the amount of tolerable risk.Step 4. Evaluating Investment Vehicles. This is done by assessing each vehicles potential return and risk. This process typically involves valuation, the use of measures of risk to estimate the worth of an investment vehicle.Step 5. Selecting Suitable Investments. Gather additional information and use it to select specific investment vehicles consistent with your goals. The best investments may not be those that simply maximize return. Other factors, such as risk and tax considerations, may also be crucial.Step 6. Constructing a Diversified Portfolio. Selecting suitable investments involves choosing vehicles that enable you to achieve investment goals and that optimize return, risk, and investment values. To do this, you will assemble an investment portfolio that meets one or more investment goals. Diversification is the inclusion of a number of different investment vehicles in a portfolio to increase returns or reduce risk. By diversifying in this way, investors are able to earn higher returns or be exposed to less risk than if they limit their investments to just one or two vehicles.Step 7. Managing the Portfolio. If the investment results are not consistent with your objectives, you may need to take corrective action. Such action usually involves selling certain investments and using the proceeds to acquire other vehicles for the portfolio. Portfolio management involves monitoring the portfolio and restructuring it as dictated by the actual behavior of the investments.

Market Timing the process of identifying the current state of the economy/market and assessing the likelihood of its continuing on its present course

A strong economy is reflected in an expanding business cycle. When business is good and profits are up, stocks react by increasing in value and return. Growth-oriented and speculative stocks tend to do especially well in strong markets. To a lesser extent, so do low-risk and income-oriented stocks. In contrast, when economic activity is declining, the values and returns on common stocks tend to be off as well.

Fitch RatingsLong-term credit ratingsFitch Ratings' long-term credit ratings are assigned on an alphabetic scale from 'AAA' to 'D', first introduced in 1924 and later adopted and licensed by S&P. (Moody's also uses a similar scale, but names the categories differently.) Like S&P, Fitch also uses intermediate +/- modifiers for each category between AA and CCC (e.g., AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, etc.).Investment grade AAA : the best quality companies, reliable and stable AA : quality companies, a bit higher risk than AAA A : economic situation can affect finance BBB : medium class companies, which are satisfactory at the momentNon-investment grade BB : more prone to changes in the economy B : financial situation varies noticeably CCC : currently vulnerable and dependent on favorable economic conditions to meet its commitments CC : highly vulnerable, very speculative bonds C : highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations D : has defaulted on obligations and Fitch believes that it will generally default on most or all obligations NR : not publicly rated

Short-term credit ratingsFitch's short-term ratings indicate the potential level of default within a 12-month period. F1+ : best quality grade, indicating exceptionally strong capacity of obligor to meet its financial commitment F1 : best quality grade, indicating strong capacity of obligor to meet its financial commitment F2 : good quality grade with satisfactory capacity of obligor to meet its financial commitment F3 : fair quality grade with adequate capacity of obligor to meet its financial commitment but near term adverse conditions could impact the obligor's commitments B : of speculative nature and obligor has minimal capacity to meet its commitment and vulnerability to short term adverse changes in financial and economic conditions C : possibility of default is high and the financial commitment of the obligor are dependent upon sustained, favorable business and economic conditions D : the obligor is in default as it has failed on its financial commitments.

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