LECTURE 1: INTRODUCTION TO

INVESTMENT MANAGEMENT

Arlene C. Gutierrez
Assistant Professor
DAME,CEM,UPLB

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
WHAT IS AN INVESTMENT?
• The current commitment of dollars
for a period of time in order to
derive future payments that will
compensate the investor for:
1. the time the funds are
committed,
2. the expected rate of inflation
3. the uncertainty of the future
payments.

“You sacrifice something of value now, expecting to benefit from

that sacrifice later.”
Department of Agribusiness Management and Entrepreneurship
CEM, UPLB
WHAT IS AN INVESTMENT?

VS

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
REAL ASSETS VS. FINANCIAL ASSETS
Real Assets • Determines the material
wealth of the society
• Includes land, buildings,
machines and
knowledge that can be
used to produce goods
and services
• Generate net income for
the economy

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
REAL ASSETS VS. FINANCIAL ASSETS
Financial Assets
• Indirectly contribute to the
productive capacity of the
economy
• Claims to the income
generated by real assets
• Include stocks, fixed income
securities, derivatives and
alternative investments
• define the allocation of
income or wealth among
investors

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
THREE BROAD CLASSES OF FINANCIAL
ASSETS

Fixed
Equity
Income

Derivatives

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
FIXED INCOME SECURITIES
• an instrument that allows
governments, companies and
other types of issuers to
borrow money from investors
• Promise either a fixed stream
of income or a stream of
income that is determined
according to a specified
formula

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
FIXED INCOME SECURITIES
• Unless the borrower is
declared bankrupt, the
payments on these securities
are either fixed or determined
by formula
• For this reason, the
investment performance of
debt securities typically is
least closely tied to the
financial condition of the
issuer.
Department of Agribusiness Management and Entrepreneurship
CEM, UPLB
FIXED INCOME SECURITIES

Money Capital
Market Market

- Long term
- Short term - Ranges from very safe
- Highly marketable in terms of default risk
- Very low risk to relatively risky

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
FIXED INCOME SECURITIES

Money Capital
Market Market

Treasury Bills
Commercial Papers Bonds
Certificate of Deposits -classified according to
Banker’s Acceptance the interest rate
Eurodollar - Classified according to
Repos and reverses issuer

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
EQUITY SECURITIES
• Represent ownership share in
the corporation
• Equity holders are not
promised any particular
payment
• They receive any dividends
the firm may pay
• They have prorated ownership
in the real assets of the firm

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
EQUITY SECURITIES
• The performance of equity
investments is tied directly to
the success of the firm and its
real assets
• Equity securities tend to be
riskier than investments in
debt securities
• Two types of Equity securities:
1. Common shares
2. Preferred shares

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
DERIVATIVE INSTRUMENTS

• provide payoffs that are

determined by the prices of other
assets such as bond or stock prices
• their values derive from the prices
of other assets
• The four main types of underlying
on which derivatives are based are
equities, fixed income
securities/interest rates,
currencies and commodities

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
DERIVATIVE INSTRUMENTS

• the primary use, is to hedge risks

or transfer them to other parties
• can be used to take highly
speculative positions
• Most common derivatives are
futures, forwards, options and
swaps

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
DERIVATIVE INSTRUMENTS

• The four main types of underlying

on which derivatives are based are
equities, fixed income
securities/interest rates,
currencies and commodities

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
FINANCIAL MARKETS AND THE ECONOMY

Timing of Consumption

Separation of management and ownership

Allocation of wealth and risk

The Informational Role of Financial Markets

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
THE INVESTMENT PROCESS

INDIVIDUAL INVESTORS
• Short Term Goals
• Providing for children’s
education, saving for a
major purchase or starting a
business
• Retirement Goals

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
THE INVESTMENT PROCESS

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
INVESTMENT PORTFOLIO
• simply his collection of investment asset
• Investors make two types of decisions in constructing
their portfolios:
Asset Allocation Security Selection

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB
INVESTMENT PORTFOLIO

Top Down Approach

Bottom up Approach

Department of Agribusiness Management and Entrepreneurship

CEM, UPLB