-
ADVANCED FINANCIAL INSTRUMENTS AND MARKETSADVANCED FINANCIAL
INSTRUMENTS AND MARKETS
LectureNo.04f fPortfolioDiversificationand
SupportingFinancialInstitutionsSupportingFinancialInstitutions
Hammad HassanMirzaAssistantProfessor(Finance)
DepartmentofBusinessAdministrationDepartmentofBusinessAdministrationUniversityofSargodha
-
TodaysDiscussionToday sDiscussion
PortfolioDiversification PortfolioDiversification
InstitutionofMutualFund
OpenEnded CloseEnded
AssetPricingModels Sharpe FamaandFrench
2PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
PortfolioandDiversificationPortfolioandDiversification
APortfolioofaRiskyandRisklessAsset
APortfolioofaRiskyandRisklessAsset
UnitedEastIndiaCompany1602(EvolutionofShare)
AmsterdamStockExchangeg TheEquityPremiumPuzzle
HarryMarkowitzandtheOriginsofPortfolioAnalysis
EfficientPortfolioFrontiers
3PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
APortfolioofaRiskyandRisklessAsset
4PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
APortfolioofTwoRiskyAssetsAPortfolioofTwoRiskyAssets
5PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
EfficientPortfolioFrontierwithTwoAssets
6PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
PortfolioVariance,ThreeRiskyAssets
7PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
SharpRatioSharpRatio
8PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
BetaBeta
9PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
S i IISessionII
10PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
TypesofInvestmentCompaniesTypesofInvestmentCompanies
O d d OpenEndFunds ClosedEndFunds UnitTrusts
11PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
MutualFundExpensesMutualFundExpenses
TypesofCosts Shareholderfeeorsales
charge
TypesofLoads Frontendload
charge Operatingexpenseor
expenseratio
Backendload Levelload
12PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
EconomicFunctionsof FundsEconomicFunctionsof Funds
RiskReductionviaDiversification RiskReductionviaDiversification
LowerCostsofContractingandInformationProcessing
ProfessionalPortfolioManagement Liquidity Variety
PaymentsMechanism
13PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
FundInvestmentObjectivesFundInvestmentObjectives
EquityFunds EquityFunds Income AggressiveGrowth
BondFunds U.S.GovernmentBonds CorporateBonds Growth
IncomeandGrowth CorporateBonds ConvertibleSecurities
MunicipalBonds
MoneyMarketMutualFunds
p
Others
14PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
FamilyofFundsFamilyofFunds
Group ofdifferentfundswithavarietyofinvestment Group
ofdifferentfundswithavarietyofinvestmentobjectivesmanaged
byaninvestmentadvisorycompany.
EconomicBenefits: Flexibility Lowercosts Lowercosts Wider
Choices
15PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
TaxationofMutualFundsTaxationofMutualFunds
Distributionsofincomearetaxableattheinvestor
Distributionsofincomearetaxableattheinvestorlevel,notthefundlevel.
Ordinaryincometax Capitalgainstax
Capitalgainsdistributions Long termcapitalgains
Longtermcapitalgains Shorttermcapitalgains
16PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
FederalRegulationofFundsFederalRegulationofFunds
SecuritiesActs of1933and1934 SecuritiesActs of1933and1934
InvestmentCompanyActof1940 InvestmentAdvisorsActof194094
InsiderTradingandSecuritiesFraudEnforcementActof1988
17PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
RecentSECPrioritiesConcerningMutualFunds
Reportingfundreturnsonaftertaxbasis Reportingfundreturnsonafter
taxbasis Morecompletereportingoffeescharged
MoreaccurateandconsistentreportingofMoreaccurateandconsistentreportingofinvestmentperformance
Greater
consistencybetweenfundpracticesandinvestmentobjective
Disclosureof portfoliopracticesi i f d li h i i
Requiringfundmanagerstolisttheirsecurity
holdingsmorefrequently
Rulestoincreaseeffectivenessandindependence
Rulestoincreaseeffectivenessandindependenceofboardsofdirectors
18PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
StructureofFundsStructureofFunds
BoardofDirectors BoardofDirectors MutualFund Distributor
OtherServiceProviders
External(independentpublicaccountant,custodian,f
)transferagent)
Internal(marketing,legal,reporting,etc.)
19PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
RecentChangesintheMutualFundIndustry
DistributionChannels DistributionChannels Supermarkets
WrapProgramsp g FeeBasedFinancialAdvisors VariableAnnuities
PurchaseCost ofMutualFunds MixandMatchM dA i iti i th U S F dM k
t MergersandAcquisitionsintheU.S.FundMarket
InternationalizationofBusinessbyU.S.Funds
20PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
AlternativestoMutualFundsAlternativestoMutualFunds
Exchangetraded funds, or ETFs, are investmentcompanies that are
legally classified as open endcompanies that are legally classified
as openendcompanies or Unit Investment Trusts (UITs), but
thatdiffer from traditional openend companies and UITsin the
following respects:
ETFs do not sell individual shares directly to investorsand only
issue their shares in large blocks (blocks ofand only issue their
shares in large blocks (blocks of50,000 shares, for example) that
are known as"Creation Units.
21PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
ExchangeTradedFundsExchangeTradedFunds
InvestorsgenerallydonotpurchaseCreationUnitswithcash.Instead,theybuyCreationUnitswitha,
y
ybasketofsecuritiesthatgenerallymirrorstheETFsportfolio.ThosewhopurchaseCreationUnitsarefrequentlyinstitutionsfrequentlyinstitutions.
AfterpurchasingaCreationUnit,aninvestoroftensplitsitupandsellstheindividualsharesonasecondarymarket.Thispermitsotherinvestorstopurchaseindividualshares(insteadofCreationUnits).purchaseindividualshares(insteadofCreationUnits).
22PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
ExchangeTradedFunds
h ll h i h h
ExchangeTradedFunds
Investors who want to sell their ETF shares have twooptions: (1)
they can sell individual shares to otherinvestors on the secondary
market, or (2) they can selly , ( ) ythe Creation Units back to the
ETF. In addition, ETFsgenerally redeem Creation Units by giving
investorsthe securities that comprise the portfolio instead ofthe
securities that comprise the portfolio instead ofcash. So, for
example, an ETF invested in the stockscontained in the Dow Jones
Industrial Average (DJIA)
ld i d i h h ld h lwould give a redeeming shareholder the
actualsecurities that constitute the DJIA instead of cash.Because
of the limited redeemability of ETF shares,yETFs are not considered
to beand may not callthemselvesmutual
funds.23PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
CommercialBanksandMutualFunds
DualRelationshipwithMutualFunds DualRelationshipwithMutualFunds
DistributingFunds ManagingFunds ManagingFunds
24PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
EconomicFunctionsEconomicFunctions
MaturityIntermediation MaturityIntermediation RiskReduction
LowerCosts PaymentsMechanism
25PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
-
ThankYou!ThankYou!26PropertyofDepartmentofBusinessAdministration,UniversityofSargodha
