Investment Management Study Guide
FINA 4112 – Fall 2013
Learning Objectives
Asset Classes and Historical Returns
Why should we invest in international stocks or bonds?
Global assets have greater share of world assets
Higher rates of return available
Diversification
**where a company’s headquarters are located is not much of a factor anymore**
Why should we invest in real estate?
Adds diversification to the portfolio (part of investment universe)
Low correlation with other assets
Very high return per unit of risk
Hedge against inflation
Good income producer
Why should we invest in Treasury Inflation Protected Securities?
Maintains purchasing power in deflation times’
Extremely low-risk investment since backed by U.S. government
Par value rises with inflation and interest rate remains fixed
Describe the major attributes of TIPS.
Available in 5, 10, and 30 year maturities
Exempt from state and local income taxes
Correlate more highly with commodities
Interest rate and price are inversely related
As principle goes up, interest goes up
Describe the historical correlation of international stocks, TIPS and real estate with traditional asset classes like common stocks and LT bonds.
US TIPs correlation with other classes:
Modern Portfolio Theory in Practice and Pitfalls
What are some of the problems with portfolio optimization?
Assumes that asset classes act in a linear fashion and have bell curve return distributions
In reality, most asset classes have tails that are fatter than the normal distribution and have negative skews
Difference between theory and practice
Pitfalls of asset class selection (which ones, performance measurable/predictable, investable, liquidity)
By limiting the asset class, you are immediately creating an inefficient model
Hedge funds are difficult to invest in because of selective self-reporting
Property transactions occur too infrequently so correlation appears to be low
Private equity and venture capital are illiquid and might only
Learning Objectives
Asset Classes and Historical Returns
Why should we invest in international stocks or bonds?
Global assets have greater share of world assets
Higher rates of return available
Diversification
**where a company’s headquarters are located is not much of a factor anymore**
Why should we invest in real estate?
Adds diversification to the portfolio (part of investment universe)
Low correlation with other assets
Very high return per unit of risk
Hedge against inflation
Good income producer
Why should we invest in Treasury Inflation Protected Securities?
Maintains purchasing power in deflation times’
Extremely low-risk investment since backed by U.S. government
Par value rises with inflation and interest rate remains fixed
Describe the major attributes of TIPS.
Available in 5, 10, and 30 year maturities
Exempt from state and local income taxes
Correlate more highly with commodities
Interest rate and price are inversely related
As principle goes up, interest goes up
Describe the historical correlation of international stocks, TIPS and real estate with traditional asset classes like common stocks and LT bonds.
US TIPs correlation with other classes:
Modern Portfolio Theory in Practice and Pitfalls
What are some of the problems with portfolio optimization?
Assumes that asset classes act in a linear fashion and have bell curve return distributions
In reality, most asset classes have tails that are fatter than the normal distribution and have negative skews
Difference between theory and practice
Pitfalls of asset class selection (which ones, performance measurable/predictable, investable, liquidity)
By limiting the asset class, you are immediately creating an inefficient model
Hedge funds are difficult to invest in because of selective self-reporting
Property transactions occur too infrequently so correlation appears to be low
Private equity and venture capital are illiquid and might only