ADVANCED FINANCIAL INSTRUMENTS AND MARKETS

LectureNo.04
PortfolioDiversificationand
f
f
SupportingFinancialInstitutions
Hammad HassanMirza
AssistantProfessor(Finance)
DepartmentofBusinessAdministration
UniversityofSargodha

Today sDiscussion
TodaysDiscussion
PortfolioDiversification
InstitutionofMutualFund
OpenEnded
CloseEnded

AssetPricingModels
Sharpe
FamaandFrench

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PortfolioandDiversification

APortfolioofaRiskyandRisklessAsset
UnitedEastIndiaCompany1602(EvolutionofShare)
AmsterdamStockExchange
g
TheEquityPremiumPuzzle
HarryMarkowitzandtheOriginsofPortfolioAnalysis
EfficientPortfolioFrontiers

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APortfolioofaRiskyand
RisklessAsset

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APortfolioofTwoRiskyAssets

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EfficientPortfolioFrontierwith
TwoAssets

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PortfolioVariance,ThreeRisky
Assets

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SharpRatio

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Beta

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S i II
SessionII

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TypesofInvestmentCompanies

OpenEndFunds
O
d
d
ClosedEndFunds
UnitTrusts

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MutualFundExpenses

TypesofCosts

TypesofLoads

Shareholderfeeorsales
charge
Operatingexpenseor
expenseratio

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Frontendload
Backendload
Levelload

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EconomicFunctionsof Funds
RiskReductionviaDiversification
LowerCostsofContractingandInformation
Processing
ProfessionalPortfolioManagement
Liquidity
Variety
PaymentsMechanism
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FundInvestmentObjectives
EquityFunds

BondFunds

Income
AggressiveGrowth
Growth
IncomeandGrowth

MoneyMarketMutual
Funds
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U.S.GovernmentBonds
CorporateBonds
ConvertibleSecurities
MunicipalBonds
p

Others
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FamilyofFunds
Group ofdifferentfundswithavarietyofinvestment
objectivesmanaged byaninvestmentadvisory
company.
EconomicBenefits:
Flexibility
Lowercosts
Wider Choices

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TaxationofMutualFunds
Distributionsofincomearetaxableattheinvestor
level,notthefundlevel.
Ordinaryincometax
Capitalgainstax

Capitalgainsdistributions
Longtermcapitalgains
Long termcapitalgains
Shorttermcapitalgains

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FederalRegulationofFunds

SecuritiesActs of1933and1934
InvestmentCompanyActof1940
InvestmentAdvisorsActof1940
94
InsiderTradingandSecuritiesFraudEnforcementAct
of1988

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RecentSECPrioritiesConcerning
MutualFunds
Reportingfundreturnsonafter
Reportingfundreturnsonaftertaxbasis
taxbasis
Morecompletereportingoffeescharged
Moreaccurateandconsistentreportingof
investmentperformance
Greater consistencybetweenfundpracticesand
investmentobjective
Disclosureof portfoliopractices
Requiringfundmanagerstolisttheirsecurity
ii f d
li h i
i
holdingsmorefrequently
Rulestoincreaseeffectivenessandindependence
ofboardsofdirectors

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StructureofFunds

BoardofDirectors
MutualFund
Distributor
OtherServiceProviders
External(independentpublicaccountant,custodian,
transferagent)
f
)
Internal(marketing,legal,reporting,etc.)

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RecentChangesintheMutual
FundIndustry
DistributionChannels

Supermarkets
WrapPrograms
p
g
FeeBasedFinancialAdvisors
VariableAnnuities

PurchaseCost ofMutualFunds
MixandMatch
MergersandAcquisitionsintheU.S.FundMarket
M
dA
i iti
i th U S F dM k t
InternationalizationofBusinessbyU.S.Funds
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AlternativestoMutualFunds
Exchangetraded funds, or ETFs, are investment
companies that are legally classified as openend
open end
companies or Unit Investment Trusts (UITs), but that
differ from traditional openend companies and UITs
in the following respects:
ETFs do not sell individual shares directly to investors
and only issue their shares in large blocks (blocks of
50,000 shares, for example) that are known as
"Creation Units.
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ExchangeTradedFunds
InvestorsgenerallydonotpurchaseCreationUnits
withcash.Instead,theybuyCreationUnitswitha
,
y y
basketofsecuritiesthatgenerallymirrorstheETFs
portfolio.ThosewhopurchaseCreationUnitsare
frequentlyinstitutions
frequentlyinstitutions.
AfterpurchasingaCreationUnit,aninvestoroften
splitsitupandsellstheindividualsharesona
secondarymarket.Thispermitsotherinvestorsto
purchaseindividualshares(insteadofCreationUnits).
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ExchangeTradedFunds
Investors who
h want to sellll their
h i ETF shares
h
h
have
two
options: (1) they can sell individual shares to other
investors on the secondaryy market,, or ((2)) theyy can sell
the Creation Units back to the ETF. In addition, ETFs
generally redeem Creation Units by giving investors
the securities that comprise the portfolio instead of
cash. So, for example, an ETF invested in the stocks
contained in the Dow Jones Industrial Average (DJIA)
would
ld give
i
a redeeming
d
i
shareholder
h h ld
the
h actuall
securities that constitute the DJIA instead of cash.
Because of the limited redeemabilityy of ETF shares,
ETFs are not considered to beand may not call
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themselvesmutual funds.
Sargodha

CommercialBanksandMutual
Funds
DualRelationshipwithMutualFunds
DistributingFunds
ManagingFunds

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EconomicFunctions

MaturityIntermediation
RiskReduction
LowerCosts
PaymentsMechanism

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ThankYou!
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