Module 1 - Lesson 3
Asset allocation: indicates the proportion of a portfolio that should be invested in available asset
classes and why. Asset classes include cash, equity, and debt securities, and alternative investments,
such as private equity, real estate, and commodities.
Investment Analysis: Investment analysis involves determining the value of investments and
identifying attractive securities and assets. An investment’s fundamental value, also called its
intrinsic value, can be the price that investors would pay for the investment if they had a complete
understanding of its characteristics.
Portfolio Construction: Portfolio construction brings everything together. Investment managers
invest in the attractive securities and assets that they identified through their investment analysis
while taking into account the client’s requirements and appropriate asset allocation.
- Passive investment managers seek to match the return and risk of an appropriate benchmark.
Benchmarks include broad market indices that cover an entire asset class, indices for a
specific industry, and benchmarks that are customised to the needs of a specific client.
o ow-cost strategies because it entails buying and holding securities based only on
their characteristics relative to a given index — such as the S&P 500 in the United
States, FTSE 100 in Europe, S&P Asia 50
- Active investment managers try to predict which securities and assets will outperform or
underperform comparable securities and assets. The managers then act on their opinions by
buying the securities and assets that they expect to outperform and selling (or simply not
buying) the securities and assets that they expect to underperform.
o Active investment strategies are more expensive than passive investment strategies
because they require greater resources. So, clients hire active managers only when
they believe that these managers have the skills needed to outperform the market
after considering all the fees and commissions.
Clearing houses and settlement agents settle trades after they have been arranged. Clearing refers to
all activities that occur from the arrangement of the trade to its settlement. Settlement consists of
the final exchange of cash for securities.
Custodians are typically banks and brokerage firms that hold money and securities for safekeeping
on behalf of their clients. They play an important role in reducing the risk of securities being lost or
stolen. Security ownership records were once commonly held as actual paper certificates in secure
Depositories act not only as custodians but also as monitors.vaults.
Providers of trading services:
- Brokers:
o Act as agents
o Find sellers for clients who want to buy, and buyers for clients who want to sell
o Serve as professional negotiators
o Ensure clients will settle their trades
- Dealers
o Participate in their clients’ trades
o Allow clients to trade when they want by being ready to buy when their
clients want to sell and to sell when their clients want to buy
o Provide liquidity because they are willing to trade on demand
o Are often proprietary traders
- Clearing Houses
o Arrange for final settlement of trades
o Promote liquidity by reassuring investors that their trades will be settled
- Settlement agencies
o Arrange final exchange of cash for securities
- Custodians
o Hold money and securities for safekeeping on behalf of clients
o May offer other services for clients, such as trade settlement and collection of
interest and dividends
- Depositories
o Act not only as custodians but also as monitors to prevent the loss of securities and
fraud
o Often are regulated
