1. Investment Process

Question 1

Investment process definition

Answer 1

Describes how investor should go about making decisions with regard to what marketable securities to invest in, how extensive investment should be, when investment should be made

Question 2

Investment process steps

Answer 2

1. Set investment policy
2. Perform security analysis using fundamental analysis
3. Construct portfolio
4. Revise portfolio
5. Evaluate performance

Question 3

How to set investment policy

Answer 3

Identify investor’s unique objective, determine amount of investable wealth, state objectives in terms of risk and return, and identify potential investment categories

Question 4

Difference asset allocation and security allocation

Answer 4

• Asset allocation: choice among broad asset classes.

- Security selection: choice of which securities to hold within asset class

Question 5

Investment policy should address

Answer 5

a. Mission statement, long-run financial goals
b. Risk tolerance: amount of risk that investor is willing to bear
c. Policy asset mix, long-run allocation to broad asset classes
d. Choice for active or passive management

Question 6

Factors that affect risk tolerance

Answer 6

• Maturity: the longer the maturity, the more risk
• Risk characteristics and creditworthiness of issuer or guarantor of investment
• Nature and priority: of claims investment has on income and assets
• Liquidity of instrument and type of market.

Question 7

How to perform security analysis using fundamental analysis

Answer 7

• Intrinsic value should equal discounted present value
• Find mispriced securities
• Compare current market price to true market value

Question 8

How to construct a portfolio

Answer 8

Identify specific assets and proportion of wealth in

which to invest, address issues of selectivity, timing, diversification

Question 9

How to revise portfolio

Answer 9

Periodically repeat step 3, revise if necessary
(increase/decrease existing securities, delete some securities, and add
new securities)

Question 10

How to evaluate performance

Answer 10

Periodic determination of performance with respect

to risk and return, requires appropriate measures of risk and return