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five Steps of the Investment Process

We are by now well aware that there are five steps in the investment process. We have already covered the first step which is Setting an investment policy covering in the process the need for an investment policy too. In this article, we shall look at the remaining four steps on the investment process.

Step 2:  Security Analysis

The analysis of various financial instruments is called security analysis. Security analysis helps a financial expert to determine the value of assets in a portfolio. The main objectives is to find mispriced securities. This can be done;

  • Using technical analysis; forecasting the direction of prices through the study of past market data, primarily price and volume.
  • Using fundamental analysis; evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors

One then has to Compare current market price to true market value and Identify undervalued securities as appropriate to constitute an investment portfolio.

Step 3:  Construct a Portfolio

What is a portfolio? A portfolio is a range of investments held by a person or organization. With the results obtained above, the investor then has to identify specific assets and proportion of wealth in which to invest. He or she has to address issues of Selectivity, Timing and Diversification.

Read Also; Suppliers And Demanders Of Funds And The Investment Process

Step 4:  Portfolio Revision

This step involves periodically repeating step 3. Revise the portfolio if necessary. The investor can Increase/decrease existing securities, Delete some securities or Add new securities depending on the circumstances. The sale and purchase of assets in an existing portfolio over a certain period of time to maximize returns and minimize risk is called as Portfolio revision.

Step 5:  Portfolio Performance Evaluation

This step involves periodic determination of portfolio performance with respect to risk and return. Requires appropriate measures of risk and return as well as relevant standards (or benchmarks). Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different. Which one is best according to you? We shall find out later.

Discover the Investing Decisions Over Investor Life Cycle

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