Week 1: Investment Companies

• Overview: Investment companies act as intermediaries, pooling investor funds

to create diversified portfolios.
o Types:
§ Unit Investment Trusts (UITs): Fixed portfolios, no active
management, declining in popularity.
§ Managed Investment Companies:
§ Open-End Funds (Mutual Funds): Shares bought/sold at
Net Asset Value (NAV), flexible structure.
§ Closed-End Funds: Fixed shares traded on secondary
markets, prices can diFer from NAV.
§ Real Estate Investment Trusts (REITs): Invest in real estate or
loans, often highly leveraged.
§ Hedge Funds: Lightly regulated, flexible strategies, restricted to
wealthy investors.
• Key Features:
o Net Asset Value (NAV): (Market Value of Assets - Liabilities) / Shares
Outstanding.
o Benefits: Diversification, professional management, and economies of
scale reducing costs.
• Mutual Funds:
o Categories: Equity, bond, money market, balanced, sector-specific, and
international funds.
o Costs:
§ Operating expenses, front-end/back-end loads, 12b-1 fees
(marketing/distribution costs).
§ Example: Higher fees reduce net returns (e.g., a 1% fee reduces a
10% gross return to 9%).

Week 2: Portfolio Construction and Asset Allocation

• Investment Process: Structured in three steps:
1. Capital Allocation: Division of funds between risky and risk-free assets.
2. Asset Allocation: Spreading investments across classes (e.g., stocks,
bonds).
3. Security Selection: Choosing specific assets within each class.
• Risk Types:
o Systematic Risk: Market-wide (e.g., interest rate changes, inflation).
o Unsystematic Risk: Firm-specific, mitigated through diversification.
o Portfolio Risk Formula: Total Risk = Systematic Risk + Unsystematic Risk.
• Portfolio Optimization:
o EPicient Frontier: Graph of portfolios oFering maximum return for a given
risk level.
o Capital Allocation Line (CAL): Combines risk-free assets with risky
portfolios to determine optimal risk-return trade-oFs.
 o Sharpe Ratio: Measures risk-adjusted returns; higher values indicate
better performance.

Week 3: Equity Analysis

• Industry Analysis:
o Macro-Level: Examines industry performance in relation to business
cycles and economic variables (e.g., interest rates, technology).
o Micro-Level: Considers specific drivers like regulation, consumer
behaviour, and technological advancements.
• Industry Life Cycle Stages:
o Pioneering Development: High risk/reward, valuations rely on growth
projections.
o Rapid Growth: Focus on scalability and competitive dynamics.
o Mature Growth: Stable earnings, valuation shifts to price-to-earnings or
dividend models.
o Stabilization: Limited growth; valuation based on predictable cash flows.
o Decline: Risks of contraction or obsolescence.
• Porter’s Five Forces:
o Analyse threats from new entrants, substitutes, supplier/buyer power,
and industry rivalry.
o Impacts profitability and informs investment attractiveness.

Week 4: Valuation Techniques

• Dividend Discount Model (DDM):
o Calculates intrinsic stock value as the present value of future dividends.
o Variants include constant growth and multistage models.
• Multiples-Based Valuations:
o Price/Earnings (P/E) Ratio: Popular but sensitive to earnings
fluctuations.
o Price/Book, Price/Cash Flow, Price/Sales Ratios: Useful for financial
stability and industry comparisons.
• Free Cash Flow Models:
o FCFF (Firm): Cash flows available to all investors; discounts at WACC.
o FCFE (Equity): Cash flows for equity holders; discounts at the cost of
equity.
• Residual Income Models:
o Value based on abnormal profits exceeding the cost of equity.

Week 5: Equity Portfolio Management

• Strategies:
o Passive: Tracks benchmarks with minimal deviation.
§ Full Replication: Directly mirrors the index but is costly.
§ Sampling: Includes representative securities to lower costs but
increases tracking error.
 o Active: Seeks outperformance by leveraging market insights or timing.
• Tracking Error:
o Measures divergence from benchmark performance.
o Minimized in passive strategies, higher in active approaches.

Week 6: Fixed Income Portfolio Management

• Bond Portfolio Strategies:
o Passive:
§ Indexing: Tracks bond index performance using representative
sampling.
§ Immunization: Matches asset/liability durations to mitigate
interest rate risk.
o Active:
§ Interest Rate Forecasting: Adjusts holdings based on predicted
rate shifts.
§ Intramarket Analysis: Identifies undervalued bonds or sectors.
• Interest Rate Sensitivity:
o Duration: Measures bond price sensitivity to rate changes; longer
duration = higher sensitivity.
o Convexity: Adjusts for curvature in price-yield relationships for accuracy.
• Special Cases:
o Callable Bonds: Limit price appreciation in declining rate environments
due to call features.
o Mortgage-Backed Securities (MBS): Prepayment risk from homeowners
refinancing limits price gains.