Finance: Capital Markets, Financial Management, and Investment Management

CHAPTER 17

The Basic Principles of Investment Management

In this chapter, we describe the activities associated with investment management . This field of finance is also referred to as asset management, portfolio management, and money management. In the the two chapters that follow, we discuss the management of the two major asset classes: equities and bonds.

THE INVESTMENT MANAGEMENT PROCESS

The investment management process involves the following five steps:

Step 1. Setting investment objectives

Step 2. Establishing an investment policy

Step 3. Selecting an investment strategy

Step 4. Selecting the specific assets

Step 5. Measuring and evaluating investment performance

We describe each step in this section.

Step 1. Setting Investment Objectives

Setting investment objectives starts with a thorough analysis of the investment objectives of the entity whose funds are being managed. These entities can be classified as individual investors and institutional investors. Within each of these broad classifications, is a wide range of investment objectives.

The objectives of an individual investor may be to accumulate funds to purchase a home or other major acquisition, to have sufficient funds to be able to retire at a specified age, or to accumulate funds to pay for college tuition for children. An individual investor may engage the services of a financial advisor or consultant in establishing investment objectives.

Institutional investors include:

• Pension funds.

• Depository institutions ...