Introductory Lecture

Course Code: MBF 702

Investment Analysis & Portfolio Management

Content

Course Instructor Introduction

Course Description

Course Scope

Course Goals & Objective

Course Learning Outcomes

Course Outline

Course FAQs

Reference and text books details

General glossary

Grading scheme of the course

Introduction

• Name: Muhammad Waqas Saghir

• Qualification: Chartered Accountant and Associate Public Accountant

• Member: Institute of Chartered Accountants of Pakistan and Pakistan Institute of Public Finance Accountants

• Experience: 10 years Professional Experience in Assurance and Business Advisory assignments

Course Description

This course begins by describing the investment environment, the various developments in investment theory, and the principles and practices of valuation.

The analyses of fixed-income securities, equity securities, derivative securities, together with other securities such as unit trusts, will then be discussed.

The theories, principles, and techniques of portfolio management will be presented.

Course Scope Investment analysis

The course is designed to provide students a thorough overview of financial markets. Students will be able to understand fundamental and technical analysis and to implement it in practical scenario.

It will help to perform economy, market and sector analysis for making wise investment decisions. Students will know how to perform company analysis to support investment decisions.

The course provides an overview and analysis of key modern valuation methods.

The course starts with a brief introduction and discussion of fundamental definitions. Then, we discuss the uses of and general approaches to valuation. The core of the course contains valuation methods applied by financial institutions nowadays such as methods based on multiples, discounted cash flows, and others. Please note that only those methods actually applied in modern practice are going to be presented.

Course Scope Portfolio Management

The objective of this course is to provide students with an overview of the key elements involved in the construction and management of portfolios. After providing a review of the risk-return relationship of financial assets and a discussion of the objectives of constructing different types of portfolios, we proceed to examine how various securities should be combined to form portfolios that meet these objectives. We also review the characteristics of derivative securities, and look into how they can be used to manage and protect portfolios.

This course will introduce you to the concept of diversification, which is a key element in portfolio design. We'll study and apply the Markowitz portfolio theory, CAPM, and efficient market hypothesis to design portfolios, to identify under- and over-valued securities, to measure price and manage risk and to evaluate investment performance. We'll discuss the pricing of bonds and stock option. You'll learn how to manage a bond portfolio and formulate option trading strategies to improve investment performance.

COURSE GOALS AND OBJECTIVES:

Students will be able to:

Explain and apply basic concepts of investment analysis Analyze and interpret financial data Demonstrate knowledge of investment management

The goal of this course is for each student to develop a thorough understanding of investments. The requirements for this course provide the opportunity to learn how to make rational investment decisions.

COURSE GOALS AND OBJECTIVES:

The specific objectives of this course are

• Describe the current investment environment (domestic & international)• Obtain & interpret investment information from various sources (both

traditional & electronic)• Analyze the various investment vehicles such as:

– Common stock– Fixed income securities– Derivative securities– Mutual funds and exchange traded funds, ETFs

 • Relate financial theories of valuation (risk & return), portfolio

management and efficient markets to current market conditions.

Course Learning outcomes

At the end of the course, you should be able to: Utilize the knowledge of the financial markets and the inherent risks and rewards involved in those markets in their business decision-making process.

Identify key factors, products and services of the markets. Describe the external factors as macro-economics forces and governmental monetary policy issues that impact the products of the markets and which can seriously affect the risk / rewards relationship within this area.

Know how to deal with capital markets, comprehend the emerging developments and analyze the investment alternatives.

Course Learning outcomes Investment Analysis

• Explain the choice of alternative firm valuation models and alternative approaches to arrive at the inputs required by a given firm valuation model.

• Analyze the financial statements of a firm to collect, compute and/or estimate the inputs required by a firm valuation model.

• Apply discounted cash flow models and relative valuation multiples to arrive at the fair value of a firm and make a trade recommendation ((buy/hold/sell)) on the stock.

• Research relevant databases to look for firm-specific, industry-specific and/or market- specific information that may support judgment on a firm’s financial health, effectiveness of management, competitiveness, value and growth potential.

• Communicate security valuation analysis and trade recommendation by a professionally written report and an oral presentation.

• Collaborate with classmates to share and discuss the work required by the short

quizzes conducted in lectures and/or the firm valuation assignment.

Course Learning outcomes Portfolio Management

• Apply the empirical findings on the efficient market hypothesis to design investment strategies.

• Apply the portfolio theory to rank and select portfolios; the CAPM to measure and price risk, explain the popularity of index funds, separate market risk from firm-specific risk, and identify mispriced securities; the theories of the term structure and the concept of duration to explain the choice of bonds.

• Derive the linear relationship between risk and expected returns. • Evaluate and compare the performances of managed funds. • Identify violations of a no arbitrage equilibrium and outline a trading strategy to

exploit it. • Apply option strategies to achieve a risk-return profile to suit some given

market condition. • Use Excel to solve portfolio problems proficiently and creatively. • Demonstrate your communication, teamwork and leadership skills through

class discussions and assignments.

Course FAQs

What is Investment Analysis?Investment management is the professional asset management of various securities(shares,

bonds and other securities) and assets in order to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds,

corporations, charities, educational establishments etc.) or private investors (both directly via investment contracts and more commonly via collective investments schemes.

What is the objective of portfolio management ?

The main reason why people have professionals manage their portfolio is to

leverage their expertise in order to generate maximum wealth from their

investments. A well-managed portfolio will not only take care of diversification, but

also allocate resources per the investor's financial objectives and appetite for risks.

Reference and Text Books Details

– Investment Analysis and Portfolio Management by

Frank K. Reilly & keith C. Brown 10th /13th Edition

– Investment Analysis and Portfolio Management by Prasanna Chandra

– Investment Analysis And Portfolio Management by Jerome Bernard Cohen, Edward D. Zinbarg, Arthur Zeikel

Websites

 – http://reilly.swcollege.com– http://www.cfapubs.org/loi/faj

Course Methodology

The instructional format will include

virtual lecture; reading material; Topics Discussions; Assignments; and quizzes to check the level of understanding.

Course Outline Investment Analysis

• Basic Concepts and definitions • Risk. Required Return. Expected Return. Discounting. Present Value.• Methods of investment analysis• Net Present Value. Sunk costs. Valuation applications. • Choice of a valuation method. Decision tree in selection valuation approaches. • Dividend Discount Model (DDM). Practical examples of DDM. • One-, two, and multi-stage DDMs. Gordon. Model. Assumptions. Advantages

and Disadvantages. • Multiples Method (P/E, P/BV, EV/EBITDA and others) • Comparative methods of valuation.

Course Outline Investment Analysis

• Most frequently used methods. Advantages and disadvantages of each method. • Critique of EBITDA as an approximation of operating cash flows. • Practical example Residual Value Method. • Description of the method and areas of application. • Venture Capital Method. This method can be applied to start-up businesses with no

sales or cash flows. It reflects the general approach of venture capitalists to investing. • CAPEX Budgeting

Methods for CAPEX budgeting (payback, discounted payback, NPV, APV and IRR). • Risk Estimation. • Estimation of the required rate of return. • Mergers & Acquisitions

Introduction. Motivation and other related issues, Valuing synergies. Real options and their impact on M&A, Application of valuation methods to M&A activities.

Definition and Application of Free Cash Flows (FCFF & FCFE).

Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE).

Course Outline Portfolio Management

• The Process of Portfolio Management Valuation• Risk, Return, and Uncertainty • Setting Portfolio Objectives & Investment Policy • The Mathematics of Diversification • The Capital Markets & Market Efficiency • Equity Valuation Tools • Security Screening Bond Pricing & Selection

Lectures Distribution

Lec 1 Basic Introduction Investment and investment Analysis

Lec 2 Basic Introduction Securities

Lec 3 Investment Process, Buying & Selling, Introduction to Market

Lec 4 Investment analysis & its methods, Accounting rate of return, Pay back period

Lec 5 Investment Analysis Methods

Lec 6 NET PRESENT VALUE – Basic considerations

Lectures Distribution

Lec 7, 8, 9

NPV Examples, IRR, Comparison of NPV and IRR, Comparing investment appraisals methods, Lease or buy decisions, Internal Rate of Return

Lec 10

Risk Analysis in investment analysis and Techniques for risk analysis

Lec 11

Profitability index, Annuities and perpetuity ,Net terminal value and Capital Rationing

Lec 12

Dividend

Lec 13& 14

Objectives Of Security Valuation And Cost Of Capital, Weighted Average Cost Of Capital

Lectures DistributionLec 15,16,17 & 18

cost of equity - dividend with constant growth (example), cost of preference shares, cost of debt –

terminology, tax on interest , irredeemable debt , redeemable debt, convertible debt & efficient

market hypothesis

Lec 19,20,21 & 22

Weighted average cost of capital, gearing, financial risk and the cost of capital, traditional theory &

modigliani and miller’s theory

Lec 23

Portfolio Objective, Return, Stock returns, Portfolio returns, Portfolio proportion & mean return

Lec 24,25

Portfolio returns, Portfolio proportion, Mean or Average return, Variance and covariance, Sample covariance,

Expectations, Expected returns, Population variance and Population covariance

Lectures Distribution

Lec 26,27

Risk, Portfolio Theory, Two assets Portfolio, Portfolio Selection, Risky and risk- free

assets, Implications for investment

Lec 28,29

Choosing an investment portfolio, CAPM, systematic and unsystematic risk, APV

Lec 29 , 30

CAPM, Alpha values, Risk adjusted WACC, Choosing a discount rate

Lec 31, 32

Business valuation - (free cash flow)

GRADING

Quiz 10% Assignments 10%

Graded discussion

5%Midterm 25% Final 50%

Thank you