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The Big Picture of Investing

Learn how to understand client needs, construct portfolios, evaluate performance, and develop investment philosophies with Dr. Lakshmi Kalyanaraman.

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The Big Picture of Investing

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  1. The Big Picture of Investing Dr. Lakshmi Kalyanaraman

  2. Step 1- Understanding the Client • Client’s needs • Client’s risk preferences • Size of portfolio • Time horizon • Client’s tax status • Utility Functions Dr. Lakshmi Kalyanaraman

  3. Step 2- Portfolio Construction • How to allocate the portfolio across different asset classes broadly defined as equities, fixed income securities and real assets (such as real estate or commodities) • Asset allocation should also be viewed in terms of investments in domestic assets and foreign assets • The above would be based on the portfolio manager’s views on markets, inflation rates, interest rates, growth, etc. Dr. Lakshmi Kalyanaraman

  4. Step 2- Portfolio Construction Which stocks, bonds and real assets? • Would be the result of valuation based on cash flows, comparables, charts and indicators and also private information that the portfolio manager possesses. Dr. Lakshmi Kalyanaraman

  5. Step 2- Portfolio Construction • Execution part • How often do you trade? • How large are your trades? • Do you use derivatives to manage or enhance your risks? • Function of: • Trading costs like commissions, bid-ask spread, price impact and trading speed Dr. Lakshmi Kalyanaraman

  6. Step 2- Portfolio Construction • Risk and Return • Measuring risk • Effects of diversification • Market efficiency : Can you beat the market? • Trading Systems: How does trading affect prices? Dr. Lakshmi Kalyanaraman

  7. Step 3-Evaluate Portfolio Performance • Objective – making most money you can given your risk preference • Evaluation questions: • How much risk did the portfolio manager take? • What return did the portfolio manager make? • Did the portfolio manager under perform or over perform? • These will be a function of • Market timing • Stock selection Dr. Lakshmi Kalyanaraman

  8. Step 3-Evaluate Portfolio Performance • Risk Models • The CAPM • The APM • Measures of portfolio evaluation Dr. Lakshmi Kalyanaraman

  9. Dr. Lakshmi Kalyanaraman

  10. Investment Philosophy • Is a coherent way of thinking about markets, how they work (and sometimes do not) and the types of mistakes that you believe consistently underlie investor behaviour Dr. Lakshmi Kalyanaraman

  11. Human Frailty • All investment philosophies is a view about human behaviour Dr. Lakshmi Kalyanaraman

  12. Why do we need an investment philosophy? • Lacking a rudder or core set of beliefs, makes you a prey for charlatans and pretenders • Switch from strategy to strategy will cause high transaction costs • Given your objectives, risk aversion and personal characteristics you need to decide what do you want Dr. Lakshmi Kalyanaraman

  13. Investment Philosophies - Categories • Market Timing versus Asset Selection • Active versus Passive Investing • Time Horizon Dr. Lakshmi Kalyanaraman

  14. Market Timing versus Asset Selection • Market timing – Overall markets (could include broader range like stock, currency, bond and real assets markets) • Asset selection – Individual assets that are mispriced (could be based on technical or fundamental, value or growth) Dr. Lakshmi Kalyanaraman

  15. Active versus Passive Investing • Passive – invest in a stock and wait for your investment payoff that will come when market recognizes and correct a misvaluation • Active – invest in a company and try to change the way the company is run Dr. Lakshmi Kalyanaraman

  16. Time Horizon • Short term strategies – markets overreact to new information, market timing • Long term strategies – buying neglected companies, passive value investors Dr. Lakshmi Kalyanaraman

  17. Coexistence of Contradictory Strategies • Market timers who trade on price momentum and contrarians • Security selectors who are growth investors and value investors Dr. Lakshmi Kalyanaraman

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