Investment Management Theory and Practical

By Ema Sulisnaningrum

This book discusses investment management in today's modern era with a strong theoretical foundation and does not leave the application of theory to practice. So this book performs two functions, namely as a reference book as well as a textbook to train students. To achieve an understanding of theory and its application in the real world, this book discusses 10 crucial things related to investment management both theoretically and practically, namely:
1. Understanding Investment Management
2. Investment Risk and Return
3. Understanding of Real and Financial Assets
4. Interest Rate and Yield Curve Theories
5. Theories on The Term Structure of Interest Rates
6. Debt Instruments
7. Stock Investment
8. Financial Derivatives
9. Technical Analysis
10. Portfolio Management

• Language: English
• Publisher: Janega Press
• Release date: Jun 1, 2022
• ISBN: 9786239953607

Book preview

Investment Management

Theory and Practical

© Janega Press

Malang 202 2

1 07 pages, 8.5 inch x 11 inch

ISBN : 978-623-99536-0-7

Author : Dr. Ema Sulisnaningrum (Indonesia)

Editor : Dr. Eny Lestari Widarni (Indonesia)

Layout : Alex Norish (German)

Cover Design : Alejandro Gonzalo (Spain)

Translator : Lilik Sumarsih (Indonesia), Alejandro Gonzalo (Spain)

Published on 21 June 202 2

In Malang

By

Janega Press

Jl. R. Tumenggung Suryo No.17, Bunulrejo, District. Blimbing, Malang City, East Java 65123

Indonesia

Website : stiekn.ac.id

Email : [e-mail]

Printed by

PT.Frost Yunior (Indonesia)

Distributed by Triple Nine Communication and partners.

Note : It is prohibited to quote or reproduce part or all of the contents of this book in any way, without the written permission of the publisher. This book is distributed to 150 countries on 4 continents (ASIA, EUROPE, AMERICA, AFRICA) with various publishers and partner distributors. You may find and purchase this book with the triple nine communications partner publisher in your country. You may also find this book published with a different ISBN from the official publications in Singapore and Madrid because partner publishers publish with different versions and with different ISBNs.

Foreword

This book discusses investment management in today's modern era with a strong theoretical foundation and does not leave the application of theory to practice. So this book performs two functions, namely as a reference book as well as a textbook to train students. To achieve an understanding of theory and its application in the real world, this book discusses 10 crucial things related to investment management both theoretically and practically, namely:

1. Understanding Investment Management

2. Investment Risk and Return

3. Understanding of Real and Financial Assets

4. Interest Rate and Yield Curve Theories

5. Theories on The Term Structure of Interest Rates

6. Debt Instruments

7. Stock Investment

8. Financial Derivatives

9. Technical Analysis

10. Portfolio Management

We hope that this book can provide practical knowledge to readers regarding investment management for both academic and practical needs .

Best Regards

Dr. Ema Sulisnaningrum

Contents

Investment Management 2

Foreword 3

Chapter 1. Understanding Investment Management 1

1.1. Basic Principles and Stages of Managing The Investment Activity of an Enterprise 2

1.2. Investment activity appraisal 4

1.3. Investment Strategy 8

Chapter 2. Investment Risk and Return 10

2.1. Risk Financing 12

2.2. Risk Management 18

2.3. Risk Classification and Risk Analysis 22

Chapter 3. Understanding of Real and Financial Assets 29

3.1. Understanding of Real Estate and Real Estate Fund 29

3.2. Understanding of Financial Assets 32

Chapter 4. Interest Rate and Yield Curve Theories 37

Chapter 5. The Theory of The Structure of The Term Interest Rate 44

5.1. Temporary Interest Rate Structure Theory 44

5.2. Keynesian Theory Vs Classical Theory in the Theory of Term Structure of Interest Rates 45

Chapter 6. Debt Instruments 48

6.1. Features of Bonds and Debentures 49

6.2. Bond Valuation 54

Chapter 7. Stock Investment 59

7.1. Analysis of The Financial Condition of The Enterprise 62

7.2. The Cost of Capital 71

7.3. Economic Value Added (EVA) 75

Chapter 8. Financial Derivatives 77

8.1. Understanding Options in Derivative Instruments 78

8.2. Trading Strategy In Derivative Instruments 79

Chapter 9. Technical Analysis 82

9.1. The Dow Theory 86

9.2. Elliott Wave Theory 88

9.3. Theory of Contrary Opinion 89

Chapter 10. Portfolio Management 92

10.1. Theories of Portfolio Management 93

10.2. Markowitz Model 98

References 102

Chapter 1. Understanding Investment Management

Investment management enters the general system of strategic financial management, being one of its main functional subsystems, which ensures the implementation of predominantly long-term financial decisions (Sasongko & Bawono, 2021).

The main goal of the financial strategy of the enterprise is ensuring the maximization of the welfare of the owners of the enterprise by creating effective directions for the growth of its market value is implemented by strategic investment management in the most active way and in the widest range of parameters. The main directions for ensuring the growth of the market value of the enterprise as a result of the implementation of effective investment activities in the strategic period (Widarni & Bawono, 2021).

One of the main results of the company's effective investment activity is an increase in the effect of its economic activity. In the real investment process, this effect is achieved due to the growth of the company's operating profit from the sale of its products, and in the financial investment process, due to the profitability of the portfolio of financial instruments. Increasing the profitability of a company as a result of investment activities is the most important direction for increasing its market value (Hidayanti & Prabowo, 2021).

The growth of the company's net assets at the expense of its internal reserves automatically increases its market value (the market value of its shares). The main direction of the company's investment activities is aimed at product diversification, various forms of industrial diversification, development of special infrastructure, and other forms that provide synergistic effects. The formation of such an effect significantly affects the growth of the market value of the company. Active investment activities shape the idea of the company as a successfully developing economic entity, which allows it to expand its circle of commercial relations, ensures the formation of financial flexibility, etc. In the process of realizing its objectives, the management of the investment activities of a company is aimed at completing the main tasks of providing adequate investment support for a high level of development of the company's operating activities.

Determination of the need for investment volume to complete the strategic objectives of the development of the company's operations at its individual stage. Maximization of return on investment is achieved by selecting the most effective investment project and financial investment instrument (in terms of net investment return) by the company. When solving this problem, it should be borne in mind that the maximization of the level of profitability (net investment return) is achieved, as a rule, with a significant increase in the level of investment risk, since there is a direct relationship between these two indicators. Therefore, the maximization of the level of profitability (profitability) of investment must be ensured within the limits of acceptable investment risk. If the rate of return (profitability) of an investment is determined or planned in advance, an important task is to reduce the level of investment risk of a particular type of investment and the investment program (investment portfolio) as a whole, ensuring the achievement of profitability (Widodo & Prabowo, 2021).

Investment risk minimization can use diversification of investment projects and financial investment instruments; avoiding certain types of investment risks and their transfer to investment partners, an effective form of their internal and external insurance. Changes in the country's investment climate, changes in the investment market as a whole or in individual segments, changes in the strategic development objectives, or financial potential of a company can cause a decrease in the expected level of profitability. Investment projects and financial investment instruments. In this regard, an important role is played by timely reinvestment of capital in the most profitable investment object, which provides the required level of efficiency of the investment activity as a whole (Puspaningtyas & Harnani, 2021).

The most important condition to ensure the possibility of capital reinvestment is the optimization of the liquidity level of the investment program (investment portfolio) formed by the company in the context of its constituent investment projects (financial investment instruments). In this case, we are talking about optimization, since the maximization of the level of liquidity of investment programs (portfolios), as a rule, is accompanied by a decrease in the efficiency of investment activities, and its minimization leads to a decrease in the probability of investment maneuvers and loss of solvency if the financial balance of the company is disturbed in the investment process.

Investment projects scheduled for implementation, which are part of the company's investment program, should be carried out as quickly as possible based on the following motives: first of all, the high pace of implementation of each investment project contributes to the acceleration of the company's overall economic development; in addition, the sooner this or that investment project is implemented, the faster the company's additional net cash flow begins to form in the form of net investment profit and depreciation; accelerated implementation of the company's investment program reducing the time to use credit resources (in particular, for investment projects financed with borrowed capital); Finally, the rapid implementation of investment projects that are part of the company's investment program helps reduce the level of investment risk posed by changes in investment markets.

A company must estimate in advance what the impact will be on the level of financial stability and solvency of the company, as well as optimize the structure of the invested capital and the cash flow of the investment for investment purposes. All of the tasks considered for managing an enterprise's investment activities are closely interrelated, although some of them are multi-directional. Therefore, in the process of strategic investment management of an enterprise, individual tasks should be optimized among themselves for the effective implementation of its main objectives. The ranking of individual tasks of strategic investment management is carried out by determining the significance (assigning a weight) to each based on priority from the point of view of the company's development and growth in its market value.

1.1. Basic Principles and Stages of Managing The Investment Activity of an Enterprise

The process of developing a management system for the investment activities of a company must be based on the principles of strategic management. Analysis of the company's investment activity aims as a comprehensive assessment of the company's internal investment potential and the effectiveness of its investment activities. In the first stage of the analysis, the total volume of investment activity of the company is studied for each stage of the period under review, the level of dynamics of this indicator is compared with the level of development of the total number of operating assets, equity capital and sales volume. In the second stage of the analysis, the ratio of the individual areas of the company's investment activity is studied - its real and financial investment volumes. The degree of dynamics of these investment volumes is compared with each other, the specific weight of each investment area is determined, and their role in the development of the company is studied (Prabowo, Sulisnaningrum & Harnani, 2021).

In the third analysis stage, the level of diversification of the company's investment activities in sectoral and regional sections is considered, the degree of compliance of this level with sectoral and regional policies for the development of its operational activities is determined. In the fourth analysis stage, the effectiveness of the company's investment activities in the period under review is determined.

The legal conditions for investment activities are studied in general and in the context of individual forms of investment (investment climate); the direct investment market situation is predicted in the context of the individual segments associated with the company's activities. It must be taken into account that it consists not only of certain types of financial markets but also of certain types of real investment markets. The study of the external investment environment and investment market conditions is carried out using strategic, technical, and fundamental analysis methods.

The company's strategic and financial objectives, which require investment support, should be considered as a system of strategic objectives of investment activities, which should be reflected in its investment policies. The investment policy of a company is the stage of the life cycle in which the company is located. The differentiating nature of a company's investment strategy objectives depends on the specific stage of its life cycle.

Justification for determining the type of investment policy for investment purposes, taking into account risk preferences. At the stage of forming the company's investment strategy, the target function of its investment activities is determined in accordance with the criteria for the ratio of profitability and risk. Such criteria are based on the general philosophy of financial management of a company, which is part of its strategic chain.

In strategic financial management theory, there are usually three types of investment policies of a company in accordance with the criteria of investors' risk preferences, namely: conservative, moderate, and aggressive. When implementing this policy, investors are not trying to maximize the amount of current income from investments, or to maximize capital growth (and, accordingly, to maximize the market value of the company), but are only concerned with the safety of capital investments. The form of implementation of the policy is the establishment of a conservative investment portfolio.

The moderate investment policy (compromise) is aimed at selecting investment objects whose current profitability, capital growth rate, and risk level are closest to the market average. When implementing this policy, the company does not seek to maximize its investment income and avoids investing in high-risk investment objects, while rejecting low-income investment projects and financial investment instruments.

Aggressive investment policies are aimed at maximizing current returns from capital investments in the near future. In the implementation of this policy, the assessment and accounting of the level of investment risk and the possible increase in the market value of the company in the long term plays an additional role. Therefore, with such an investment policy, companies avoid capital investment in real projects with long investment cycles, in stocks with low dividend rates, in bonds with long maturities, and so on. This policy is carried out by establishing an aggressive investment program (aggressive investment portfolio).

The choice of a certain type of investment policy of an enterprise for the purpose of investing capital, taking into account the risk preferences of its owners and managers, is carried out taking into account the following factors:

- the company's financial philosophy;

- the type of corporate strategy and company finance is chosen;

- the presence of the necessary options on the investment market of real investment projects and relevant financial investment instruments;

- the company's financial condition.

At the stage of forming the company's investment strategy, the ratio of the volume of real and financial investment in the process of future investment activities is determined. The establishment of corporate investment policies in sectoral and regional contexts forms the basis for the distribution of investment resources in the context of strategic business centers.

During this stage, consistency of individual areas of the company's investment strategy is ensured in terms of volume, implementation period, and other parameters. Thus, the process of developing a company's investment strategy includes determining the general period for the formation of an investment strategy; determination of strategic targets for investment activities. With the large volume of the company's investment activity, its investment strategy is distinguished in the context of real and financial investments.

1.2. Investment activity appraisal

In order to assess the main indicators of the company's investment activity, it is necessary to consider the company's annual balance sheet, the total value of the company's property, the cost of fixed assets that are immovable, and other non-current assets. The economic