Financial Investment Management

Room: Zoom
Days: M/W
Time: 12:00 – 3:00 p.m.
Days: Tuesdays
Time: 8:00 – 11:00 a.m.
Plato: The beginning is the most
important part of the work.
 Course Description
• Develop & enhance basic understanding of the
Management of Financial Investments.
• Introduction to the financial environment,
institutions and markets.
• Introduction to the principles of investments.
• Review of the time value of money.
• Interpretation & analysis of financial statements.
• Cash flow analysis
• Capital management: payback period, IRR & NPV
• Financial planning - sourcing, financing and
investment options.
 Teaching-Learning Strategies

• Lecture and Class Discussions

• Situational and Case Analysis
 Course Requirements
• Attendance and Attitude
• Class Participation
• Quizzes/Long Tests
• Assignments/Discussions
• Major Exams (Prelim, Midterm, Final)
 Grading System
• Class Participation 20%
• Quizzes/Long Tests 20%
• Assignments/Discussions 20%
• Major Exams (Prelim, Midterm, Final) 40%

 Final Grade = Prelim + Midterm + Final

3
 Where We Stand
• Everyone starts with a perfect grade
• How you maintain that mark until the end of
the semester is entirely within your control
– Attendance and Attitude
– Class Participation
– Quizzes/Long Tests
– Assignments/Discussions
– Major Exams (Prelim, Midterm, Final)
 My Expectations
• At the end of the semester :
– Students should be able to:
• Demonstrate acceptable level of mastery
of the basic concepts and principles of
financial investment management.
(Competence)
• Demonstrate adherence to quantitative &
technical principles in financial
investment management and decision
making (Character)
• Achieve a responsible attitude towards
researching and presenting results: time value
of money & key financial ratios (Commitment to
achieve)

• Demonstrate a confident approach and sense

of accomplishment in evaluating real life
investment and financial transactions.
(Collaboration)
• Illustrate the different uses of financial
investment techniques to help management
achieve its financial objectives. (Creativity)
 Financial Environment
The financial environment is the effect of different
functions of the economy on the financial
outcomes of a country, or area. Relates to money,
capital, or credit and to the wealth and the assets &
liability an entity has.

Assets - enable growth and sustainability for a

steady and liquid financial environment.

How should money be spent ??

 Countries
Some countries' treasuries have more responsibilities than
others, the main responsibilities of the United States treasury
include:
a. Managing the federal finances
b. Collection of taxes
c. Collection of debts and other monies owed to the
country
d. Deciding on investments abroad
e. Managing the national debt
f. Enforcing federal laws, with regard to taxation

The Secretary heads the treasury and other important roles

in the treasury are the Deputy Secretary, Financial Officers
and Inspector Generals.
Financial Institutions in the Philippines
• Banks
– Unibanks
– Commercial banks
– Savings banks
– Thrift banks
• Microfinance lending institutions
• Government agencies: SSS,GSIS,Pag-Ibig, etc.
• Credit cooperatives
 Investors
• Individuals
• Companies
• Financial institutions
• Countries
 Market
• Bull Market - trends are identified by the
perception that investors are charging full
speed ahead with gobbling up stocks. They
are confident in the economy and are putting
loads of money into the economy. Prices of
stocks tend to rise as supply dwindles. The
term bull can also be used to describe the
investor keen on seeing stock values rise.
• Bear Market - trend is categorized when it
seems investors have gone into hibernation.
They sell everything, stop buying and horde
their money out of fear of pending disasters in
the economy. A domino effect occurs. Other
investors get nervous because they see their
colleagues abandoning ship. More investors
follow. Prices of securities continue to fall
because no one is buying. For a prolonged
period of time prices drop as low as 20 percent
or more. These kinds of reactions can be
prompted by corporate losses being reported
over consecutive quarters or any number of
economic indicators.
 Investment Management
• Onset of 20th century – a skill & an art
– Instinct
– Luck
• John Burr Williams (1938)
– Founder and developer of fundamental analysis
– The Theory of Investment Value
• Discounted Cash Flow (DCF) based valuation
• Dividend based valuation.
• Markowitz (1959)
– Modern Portfolio Theory
• asset risk
• return
• correlation and
• diversification
 Investment
• Current commitment of money or other resources
for an expected return in the future
• Pure and simple wealth maximization is not the only
objective
• Constraints to investment decisions
– Time
– Law
– Physical resources
– Financial resources
– Psychological predisposition
– Emotional disposition
 Assets
• Something that is owned and has monetary
value
– Financial assets : intangible
• Stocks
• Bonds
– Physical assets (real assets) : tangible
• Precious metals
• Real estate
• Differ: Income generating, divisibility, liquidity,
holding period and information availability
 Investment Process
• Processes
– Analyzing
– Evaluating
– Implementing
– Monitoring
• Factors to consider
– Macro & microeconomic: inflation, unemployment,
interest rates, foreign exchange rates, GNP, cost of
wages, sales, etc.
– Political environment
– Socio-cultural aspects
– Trends in the global capital markets
Intrinsic Value of a Financial Asset
• Earnings potential
• Management
• Economic outlook
• Competition
• Market condition
 Determining Security Prices
• Efficient Market Hypothesis
• Fundamental analysis
• Technical analysis
 Efficient Market Hypothesis
• asserts that financial markets are "informationally
efficient". In consequence of this, one cannot
consistently achieve returns in excess of average
market returns on a risk-adjusted basis, given the
information available at the time the investment is
made.
• There are three major versions of the hypothesis:
– “weak” : claims that prices on traded assets (e.g., stocks,
bonds, or property) already reflect all past publicly
available information.
– “semi-strong” : claims both that prices reflect all publicly
available information and that prices instantly change to
reflect new public information. and
– “strong” : claims that prices instantly reflect even hidden
or "insider" information.
Efficient Market Hypothesis cont…
• Critics have blamed the belief in rational
markets for much of the late-2000s financial
crisis.
• In response, proponents of the hypothesis
have stated
– that market efficiency does not mean having no
uncertainty about the future,
– that market efficiency is a simplification of the
world which may not always hold true, and
– that the market is practically efficient for
investment purposes for most individuals
End of Lecture
 Goals - Targets
There is a shade of difference between the terms
"goal" and "target" in a business setting. Goals are far-
reaching and comprehensive, while targets are focused
and specific. Both play a critical role in strategic
business management.
Goals give a broad vision of what a company is
trying to accomplish. These are the far-reaching,
pervasive guidelines that shape a business plan.
Sometimes goals are expressed in the form of a
company mission statement.
Targets are highly specific items that work like
lighthouses on a bay. They help employees to make day
to day decisions. They are sometimes expressed in non-
financial terms. Management expects targets to be met
in order for goals to be achieved.
 Finance
Finance is the practice of funds management, or
the allocation of assets and liabilities over time
under conditions of certainty and uncertainty. A
key point in finance is the time value of money,
which states that a unit of currency today is
worth more than the same unit of currency
tomorrow. Finance aims to price assets based on
their risk level, and expected rate of return.
 Personal Finance
The six key areas of personal financial planning, as
suggested by the Financial Planning Standards
Board, are:
1) Financial position
2) Adequate protection
3) Tax planning
4) Investment and accumulation goals
5) Retirement planning
6) Estate planning
 Financial Position
is concerned with understanding the personal
resources available by examining net worth and
household cash flow.
Net worth is a person's balance sheet,
calculated by adding up all assets under that person's
control, minus all liabilities of the household, at one
point in time.
Household cash flow totals up all the expected
sources of income within a year, minus all expected
expenses within the same year.
From this analysis, the financial planner can
determine to what degree and in what time the
personal goals can be accomplished.
 Adequate Protection
the analysis of how to protect a household from
unforeseen risks. These risks can be divided into
liability, property, death, disability, health and long
term care.
Some of these risks may be self-insurable, while
most will require the purchase of an insurance
contract. Determining how much insurance to get, at
the most cost effective terms requires knowledge of
the market for personal insurance.
Business owners, professionals, athletes and
entertainers require specialized insurance
professionals to adequately protect themselves.
Since insurance also enjoys some tax benefits,
utilizing insurance investment products may be a
critical piece of the overall investment planning.
 Tax Planning
typically the income tax is the single largest expense in
a household. Managing taxes is not a question of if
you will pay taxes, but when and how much.
Government gives many incentives in the form
of tax deductions and credits, which can be used to
reduce the lifetime tax burden. Most modern
governments use a progressive tax.
Typically, as one's income grows, a higher
marginal rate of tax must be paid. Understanding how
to take advantage of the myriad tax breaks when
planning one's personal finances can make a
significant impact.
 Investment and Accumulation Goals
planning how to accumulate enough money - for large purchases and life
events - is what most people consider to be financial planning. Major
reasons to accumulate assets include, purchasing a house or car, starting a
business, paying for education expenses, and saving for retirement.
Achieving these goals requires projecting what they will cost, and
when you need to withdraw funds. A major risk to the household in
achieving their accumulation goal is the rate of price increases over time, or
inflation. Using net present value calculators, the financial planner will
suggest a combination of asset earmarking and regular savings to be
invested in a variety of investments.
Managing these portfolio risks is most often accomplished using
asset allocation, which seeks to diversify investment risk and opportunity.
This asset allocation will prescribe a percentage allocation to be
invested in stocks, bonds, cash and alternative investments. The allocation
should also take into consideration the personal risk profile of every
investor, since risk attitudes vary from person to person.
 Retirement Planning
is the process of understanding how much it
costs to live at retirement, and coming up with a
plan to distribute assets to meet any income
shortfall. Methods for retirement plan include
taking advantage of government allowed
structures to manage tax liability including:
individual (IRA) structures, or employer
sponsored retirement plans.
 Estate Planning
involves planning for the disposition of one's
assets after death. Typically, there is a tax due to
the state or federal government at one's death.
Avoiding these taxes means that more of
one's assets will be distributed to one's heirs.
One can leave one's assets to family, friends or
charitable groups.
 Financial Policy
Criteria describing a corporation's choices
regarding its
1) debt/equity mix
2) currencies of denomination
3) maturity structure
4) method of financing investment projects
5) hedging decisions
with a goal of maximizing the value of the firm to
some set of stockholders.
 Financial Planning
Evaluating the investing and financing options
available to a firm. Planning includes
1) attempting to make optimal decisions
2) projecting the consequences of these
decisions for the firm in the form of a financial plan
3) and then comparing future performance
against that plan.
 Financial Control
• Management control of financial activities aimed at
achieving desired return on investment. Managers
use financial statements (a budget being the primary
one), operating ratios, and other financial tools to
exercise financial control.
• The policies and procedures established by an
organization for managing, documenting, and
reporting its financial transactions
• The management of a firm's costs and expenses in
relation to budgeted amounts.
• Any measure of how well a company or department
controls its costs, sometimes expressed as how far
under or over budget it is.