DEFINITION OF 'ASSET ALLOCATION'

An investment strategy that aims to balance risk and reward by apportioning a portfolio's
assets according to an individual's goals, risk tolerance and investment horizon.
There is no simple formula that can find the right asset allocation for every individual.

DEFINITION OF 'RISK MANAGEMENT'

The process of identification, analysis and either acceptance or mitigation of uncertainty in
investment decision-making.
Inadequate risk management can result in severe consequences for companies as well as
individuals.

PORTFOLIO MANAGEMENT PROCESS

The portfolio management process is the process an investor takes to aid him in meeting his
investment goals.
The procedure is as follows:
1. Create a Policy Statement -A policy statement is the statement that contains the
investor's goals and constraints as it relates to his investments.
2. Develop an Investment Strategy - This entails creating a strategy that combines the
investor's goals and objectives with current financial market and economic conditions.
3. Implement the Plan Created -This entails putting the investment strategy to work,
investing in a portfolio that meets the client's goals and constraint requirements.
4. Monitor and Update the Plan -Both markets and investors' needs change as time
changes. As such, it is important to monitor for these changes as they occur and to
update the plan to adjust for the changes that have occurred.
SELECTING INVESTMENT IN GLOBAL MARKET
Reasons for the expansion of investment opportunities
1. Growth and development of foreign financial markets
2. Advances in telecommunications technology
3. Mergers of firms and security exchanges

The Case for Global Investments

Rates of return available on non-U.S. securities often exceed U.S. Securities due to higher
growth rates in foreign countries, especially the emerging markets
Diversification with foreign securities can help reduce portfolio risk because foreign markets
have low correlation with U.S. capital markets.

DEFINITION OF 'EFFICIENT FRONTIER'

A set of optimal portfolios that offers the highest expected return for a defined level of risk or
the lowest risk for a given level of expected return.
Portfolio management is all about strengths, weaknesses, opportunities and threats in the
choice of debt vs. equity, domestic vs. international, growth vs. safety

CAPITAL MARKET EFFICIENCY

The degree to which the present asset price accurately reflects current information in the
market place.
EFFICIENT MARKET HYPOTHESIS (EMH)

The efficient market hypothesis (EMH) maintains that all stocks are perfectly priced
according to their inherent investment properties, the knowledge of which all market
participants possess equally.
THE THREE BASIC FORMS OF THE EMH
1. Weak-Form EMH (PRIVATE INFORMATION)
This hypothesis assumes that the rates of return on the market should be independent; past
rates of return have no effect on future rates.
Statistical Tests
Trading Tests
2. Semi-Strong EMH (PUBLIC INFORMATION)
This hypothesis assumes that stocks adjust quickly to absorb new information. stock prices
reflect all new available information and investors purchase stocks after this information is
released
Event Tests
Regression/Time Series Tests
3. Strong-Form EMH (PUBLIC AND PRIVATE)
Given the assumption that stock prices reflect all information (public as well as private) no
investor would be able to profit above the average investor even if he was given new
information.
Insiders
Analysts
A Financial Ratio is an index that relates two accounting numbers and is obtained by
dividing one number by the other.
1. Current Ratio = Current Assets/Current Liabilities
2. Acid-Test (Quick) Ratio = Current Assets Inv / Current Liabilities
3. Debt-to-Equity = Total Debt / Shareholders Equity
4. Debt-to-Total-Assets = Total Debt / Total Assets
5. Total Capitalization = Total Debt / Total Capitalization
6. Interest Coverage = EBIT / Interest Charges
7. Receivable Turnover = Annual Net Credit Sales / Receivables
8. Avg Collection Period = Days in the Year / Receivable Turnover
9. Payable Turnover (PT) = Annual Credit Purchases / Accounts Payable
10. PT in Days = Days in the Year / Payable Turnover
11. Inventory Turnover = Cost of Goods Sold / Inventory
12. Total Asset Turnover = Net Sales / Total Assets
13. Gross Profit Margin = Gross Profit / Net Sales
14. Net Profit Margin = Net Profit / Net Sales
15. Return on Investment = Net Profit after Taxes / Total Assets
16. Return on Equity = Net Profit after Taxes / Shareholders Equity