Investment and Portfolio

Management
D/ Ahmed EL Otiefy
D/ Ahmed EL Otiefy
PhD inPhD
Finance
in Finance
 Investment concept
• Defining Investment: A current commitment of $ for
a period of time in order to derive future payments
• Investing is owning a group of assets with the aim
of obtaining a return in the future.
• Any investment will be followed by a degree of risk
(The possibility of losing the return or losing all or
part of the capital)
• The higher the investment risk, the higher
the expected return for the investor
 Reason for Investing
• By investing (saving money now instead of
spending it)
• Individuals can trade off present consumption for a
larger future consumption.
 Financial assets
STOCK / BONDS

• Physical assets
Real estate - land - commercial buildings - shops
 What is Asset Allocation?
• Asset Allocation: It is the process of deciding
how to distribute an investor’s wealth among
different countries and asset classes for
investment purposes.
• Asset Class: It refers to the group of
securities that have similar characteristics,
and risk/return relationships
Investment Assets = Investment Classes

• 1- Stock
• 2-Bonds
• 3-Real Estate
• 4-Commoditys
• 5-Currency GOLD -Silver
 why The future is Uncertain
Why The future is Uncertain

• change in interest
• change in inflation
• Change in stock price trends
• Local or global political changes

• (The return is also Uncertain)

 Various investment tools
• Direct investment instruments: securities,
including common shares, preferred shares,
and bonds
• Indirect investment tools: Mutual funds
 Money market
• Treasury bills - It is issued by governments

• Capital market (stock market)

• The capital market is the market in which securities

are traded and exchanged, whether they are debt
rights (government bonds or corporate bonds) or
equity (common and preferred shares)
 Types of capital market

• Primary market
• The first issue of corporate shares
• Secondary market
• It is the market in which securities are
traded between different sellers and buyers,
where the return from buying and selling
operations goes to different sellers and
buyers.
 Types of shares
• Common Stocks(Financial assets)
• The definition of the share is the instrument
that is delivered to the shareholder in the
company and represents the amount of the
share that the shareholder has contributed
in the company’s capital
 Common Stock Rights
• 1-The right to remain in the company
• 2-The right to vote in the General Assembly
• 3-The right to obtain his share of the company's
profits, as well as the assets upon liquidation
• 4-The right to monitor the company’s business (reviewing
the balance sheet and profit calculation…).
• 5-Obtaining cash dividends from the company's profits
 Preferred stock
• Preferred shares are a special class of
shares, where each share usually receives a
guaranteed dividend that is first in priority.
 Why are companies listed in the
stock market?
• Get Financing
Get Financing
• Investor Exit Investor Exit
• Diversity of the of
Diversity ownership basebase
the ownership

• Why does an investor buy shares?

• To obtain a return (cash dividends - capital
To obtain a return (cash dividends - capital gains)
gains)
 individual cash
investor dividends

Invest company

cash
Foundation dividends
investor
Risk free return

Certain

Treasury bills . Bonds

Principal+ coupon
The difference between a bond and
a stock
Stock Bond
share capital Loan Definition
The right to vote, the No rights to attend
Rights
share in the any general
liquidation of the assemblies or
company, the share in otherwise
the profitability of the
company
Activity risk, financing Interest The inability
Risk
risk, liquidity risk, to pay the principal
exchange rate risk, amount or coupons
political risk
 Investment Risk

Political, inflation,
Systematic interest rate change,
Risk fiscal policy, health,
natural risks
industry risks
 Company risk
Unsystematic Board of Directors -
Risk embezzlement -
competitor – fire
Business Risk
 Financial Risks
• Financial risks are those that arise from exposure to
financial markets. Examples are:
• • Credit risk. This is the uncertainty about whether the
counterparty to a transaction
• will fulfill its contractual obligations.
• • Liquidity risk. This is the risk of loss when selling an
asset at a time when market
• conditions make the sales price less than the underlying
fair value of the asset.
• • Market risk. This is the uncertainty about market prices
of assets (stocks,
• commodities, and currencies) and interest rates.
 Non-Financial Risks
• Non-financial risks arise from the operations of the organization and from sources
• external to the organization. Examples are:
• Operational risk. This is the risk that human error or faulty organizational processes
• will result in losses.
• • Solvency risk. This is the risk that the organization will be unable to continue to
• operate because it has run out of cash.
• • Regulatory risk. This is the risk that the regulatory environment will change,
• imposing costs on the firm or restricting its activities.
• • Governmental or political risk (including tax risk). This is the risk that political
• actions outside a specific regulatory framework, such as increases in tax rates, will
• impose significant costs on an organization.
• Legal risk. This is the uncertainty about the
organization's exposure to future legal action
• • Model risk. This is the risk that asset
valuations based on the organization's
analytical models are incorrect.

• • • Accounting risk. This is the risk that the

organization's accounting policies and
• estimates are judged to be incorrect.
 Measures of risk for specific asset
types
• Standard deviation is a measure of the volatility of asset
prices and interest rates.
• Standard deviation may not be the appropriate measure
of risk for non-normal
• probability distributions, especially those with negative
skew or positive excess
• kurtosis (fat tails).
• • Beta measures the market risk of equity securities and
portfolios of equity securities. This measure considers
the risk reduction benefits of diversification and is
appropriate for securities held in a well-diversified
portfolio, whereas standarddeviation is a measure of risk
on a stand-alone basis.
Calculate and interpret major return
measures
• Average Returns
• The arithmetic mean return is the simple average of a series of periodic returns.
It has the statistical property of being an unbiased estimator of the true mean
of the underlying distribution of returns

• :
• The geometric mean return is a compound annual
rate. When periodic rates of return vary from period
to period, the geometric mean return will have a
value less than the arithmetic mean return:
• The money-weighted rate of return is the
internal rate of return on a portfolio based on all of its cash
inflows and outflows. To calculate a money-weighted rate of
return, consider the beginning value and additional
deposits of cash by the investor to be inflows and consider
withdrawals of cash, interest, and dividends (which are
additional cash available to be withdrawn) and the ending
value to be outflows.