EKRP 221 EC

INVESTMENT MANAGEMENT
Faculty of Economic and Management Sciences

Study guide compiled by: Dr Ezelda Swanepoel, Dr Pieter G Vosloo, Prof Chris van Heerden
and Mrs Wilmé van Heerden
Copyright © 2022 edition. Review date 2022.
North-West University

No part of this study guide may be reproduced in any form or in any way without the written permission of the publishers.
It all starts here
• Ranked in the top 5% of universities globally by the QS-rankings
• Contribute the second largest number of graduates annually to the labour market

Dit begin alles hier

• As een van die top 5% universiteite wêreldwyd deur die QS-ranglys aangewys
• Lewer jaarliks die tweede meeste graduandi aan die arbeidsmark

Gotlhe go simolola fano

• Re beilwe mo gare ga diyunibesiti tse 5% tse di kwa godimo go ya ka peo ya
maemo ya QS
• Ngwaga le ngwaga go abelwa palo ya bobedi ka bogolo ya badiri mo maketeng
ya badiri
MODULE CONTENTS
Module information ............................................................................................................................ ii
Word of welcome ............................................................................................................................... ii
Rationale ............................................................................................................................................ ii
Module outcomes .............................................................................................................................. iii
Study material ................................................................................................................................... iv
Study process ................................................................................................................................... iv
How to study ...................................................................................................................................... v
Module plan ....................................................................................................................................... v
Evaluation ......................................................................................................................................... vi
Action words ..................................................................................................................................... vi
Icons ................................................................................................................................................. ix
Warning against plagiarism ............................................................................................................... ix

Study unit 1 The investment background ..........................................................................1

Study section 1.1 The investment setting ......................................................................................2
Study section 1.2 Organisation and functioning of securities markets ...........................................3
Study section 1.3 Developments in investment theory ..................................................................4
Study section 1.4 The time value of money ...................................................................................5
Study section 1.5 Valuation principles and practices .....................................................................6

Study unit 2 Equity analysis ...............................................................................................7

Study section 2.1 Fundamental analysis........................................................................................8
Study section 2.2 Industry analysis ................................................................................................9
Study section 2.3 Company analysis ...........................................................................................11
Study section 2.4 Company valuation ..........................................................................................12
Study section 2.5 Technical analysis ...........................................................................................13

Study unit 3 Portfolio management ..................................................................................15

Study section 3.1 Portfolio management .....................................................................................16
Study section 3.2 Evaluation of portfolio management ................................................................17

i
Module information
Module code EKRP 221

Module credits 16

Module name Investment management

Name of lecturer(s) Mrs Wilmé van Heerden

Office telephone 018 285 2329

Email address 21665052@nwu.ac.za

Building and Office nr Room 132, Building E3

It is preferable that you make an appointment if you wish

to see the lecturer. Whenever problems relating to a
subject are discussed in the lecturer’s office, he/she will
ascertain whether the student has seriously been trying to
Consulting hours
solve the relevant problem. This would definitely lead to a
more sensible and purposeful discussion, especially if you
inform the lecturer of your problem as soon as you make
an appointment.

Vaal Triangle Campus

Name of lecturer(s) Dr. Damien Kunjal

Office telephone Not available

Email address Damien.Kunjal@nwu.ac.za

Building and Office nr Not available.

Word of welcome
Welcome to EKRP 221 (Investment Management). We trust that you will find this
course both challenging and interesting.

Rationale
You always wanted to know more about investments, stocks, the JSE and all those
interesting stuff. Well, this is your opportunity in your quest for knowledge. Bodie, Kane
and Marcus (1996, vii) observed that the field of investments have experienced many
changes over the last view decades. This is in part due to an abundance of newly
designed securities; in part due to the creation of new trading strategies that would
have been impossible without concurrent advances in computer technology; and in part
due to rapid advances in the theory of investments that have come out of the academic
community. In no other field, perhaps, is the transmission of theory to real-world
practice as rapid as is now commonplace in the financial industry. These developments

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 place new burdens on practitioners of investments far beyond what was required only a
short while ago.
Investment management is a prominent discipline in any business environment. Its
purpose is to achieve the investor’s required return given the risk associated with the
investment. In this regard entrepreneurs and shareholders accept the risk associated
with a certain type of business to earn the reward associated with that particular type of
business or industry. However, as the investment is exposed to a variety of factors, the
decision to invest in a specific type of asset class or a combination of asset classes is a
cumbersome and difficult process. The reason is that these factors originate from the
world we live in and include inter alia the investment markets; the industries and
businesses operating in those markets; government policy associated with those
markets; and market- and investor sentiment (behaviour). Taking cognisance of the
risks presented in this environment, it is indeed not an easy environment when dealing
with an investor’s expectations.

Module outcomes

Upon the successful completion of this module, the student should be

able to:
• demonstrate a solid knowledge of the general principles of Investment
Management;
• explain and calculate the required rate of return as investment criteria;
• discuss the fundamental principles of investment in terms of risk/return and the
time value of money;
• calculate the intrinsic value of an investment;
• explain diversification;
• discuss the investment management process;
• discuss the organisation and functioning of security markets;
• distinguish between the different investment theories;
• discuss valuation principles and practices in investment management;
• practically illustrate a solid body of knowledge, by means of case studies and real
life examples, of fundamental analysis;
• practically illustrate a solid body of knowledge, by means of case studies and real
life examples, of technical analysis;
• calculate by means of performance measures the performance of a diversified
portfolio; and
• work in groups and/or as an individual and effectively communicate information in
writing or orally in an ethically, responsible, and acceptable manner.

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Study material
Investment Management, 6th edition. Van Schaik Publishers. Marx, J., De Beer J.S.,
Mpofu, R.T. & Mynhardt R.H. 2022. ISBN 978 0 627 03912 6
Recommended reading: Reserved at the reserve counter of the library.
Any additional study material will be provided on e-Fundi.
REQUIREMENT: You will be required to use a financial calculator during the course. It
is recommended that you invest in either one of the following Business/Financial
calculators.
• SHARP EL738
• CASIO Fc 100v
• CASIO Fc 200v
• HP10 BII+
The textbook examples are explained using a SHARP Business/Financial calculator.

Useful web pages:

• Johannesburg Stock Exchange: www.jse.co.za
• Trade simulation platform: https://www.gt247.com/
• South African Reserve Bank: https://www.resbank.co.za
• Bloomberg: https://bloomberg.com
• New York Stock Exchange: https://www.nyse.com

Study process

Approach
Your success in investment management will depend on your own efforts. Guide your
study by making use of your study guide, which will give you direction throughout the
module. Attend the contact sessions diligently and complete the exercises in the study
guide to prepare yourself for tests and the examination.

The study units

The module is structured into three study units addressing:
i) The investment background.
ii) Equity analysis.
iii) Portfolio management.
Each study unit covers certain topics and consists of different study sections. Each
theme will be discussed in the class in the form of lectures. Consequently, it is
expected of each student to be well acquainted with the work of each lecture, not only
for continual evaluation, but also for purposeful class discussions. Therefore it is
expected that at least the overview should have been studied before attending the
lecture.

iv
How to study
Independent study and preparation of prescribed sections are essential. There is,
however, a vast difference between the reading of text and studying and understanding
investment management. The aim of this course module is not only to extend your
knowledge of the functioning of the investment environment and the management of
investments, but also to enable you to use your knowledge to analyse and address
investment management problems.

The following study steps can be identified when working through a study
unit:
• Read the study unit outcomes and understand how the study sections deal with
the study unit outcomes.
• Start with each study section by studying its relevant goal, structure and study
outcomes.
• Work through the text systematically.
• Try to define and understand all the important concepts.
• Evaluate yourself by completing the self-evaluation questions and relevant
assignments.
• It is well advised to start with your theory then move on to your calculations.

Module plan

Study unit 1: The Investment Background

Study section 1.1 The investment setting
Study section 1.2 Organisation and functioning of securities markets
Study section 1.3 Developments in investment theory
Study section 1.4 The time value of money
Study section 1.5 Valuation principles and practices

Study unit 2: Equity Analysis

Study section 2.1 Fundamental analysis
Study section 2.2 Industry analysis
Study section 2.3 Company analysis
Study section 2.4 Company valuation
Study section 2.5 Technical analysis

Study unit 3: Portfolio Management

Study section 3.1 Portfolio management
Study section 3.2 Evaluation of portfolio management

v
Evaluation
Your participation mark will be calculated from the results of tests/homework and the
assignment that will be completed throughout the semester. You will need a
participation mark of 40 percent to obtain entry to the examination.
There are two examination opportunities, of which at least one must be written. Final
detail regarding the two examinations will be given during the class sessions. Both
opportunities will consist of a 3-hour paper with a maximum of 100 marks. All the study
units will be tested. Your final mark will be calculated from the participation mark and the
examination results. The following weights will apply:
Participation mark: 50%
Examination mark: 50%
Final mark: 100%
In order to pass EKRP 221, you must obtain:
i) A minimum of 40% in the examination.
ii) A final mark of at least 50%.

Action words
These action words are included to be clear about what is expected from the learner.
Study them well so that you know exactly what is expected of you when you come
across them in the course of this module.
• Analyse
Identify parts or elements of a concept and describe it individually.
• Compare
Point out the similarities (things that are the same) and the differences between
ideas, concepts/objects and points of view. The word contrast may also be used.
When comparing two or more concepts you should do so systematically by
completing one at a time. It is always better to do it in your own words.
• Criticise
This means that you should indicate whether you agree with a certain perspective
or point of view or not. You should then describe what it is that you agree or
disagree with and give reasons for your view.
• Define
Give the precise meaning of something. Often you should learn definitions by
heart.
• Demonstrate
Include examples and discuss them. You have to prove that you understand how
a process works and how a concept is applied in real-life situations.
• Describe
Say exactly what something is like. Give an account of the characteristics of a
certain concept or nature of something. Explain how something works. No
opinion or argument is needed.

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• Discuss
Comment on something in your own words. It often requires that two
perspectives or two different possibilities be debated.
• Distinguish
Indicate the difference between topics, different ideas or points of view. It usually
requires that you use your own words.
• Essay
A comprehensive description of a topic is necessary.
• Example
A practical illustration of a concept is required.
• Explain
Explain something or give reasons for something, usually in your own words.
You should prove that you understand the contents. It can be valuable to use
illustrations or examples.
• Formulate
This means you have to state something systematically.
• Identify
Give the essential characteristics or aspects of a phenomenon, for example a
good research design.
• Illustrate
Draw a diagram, graph or sketch that represents a phenomenon, idea or theory.
• List
Simply provide a list of names, facts or items asked for. A specific category or
sequence can be specified.
• Motivate/substantiate
You should give an explanation of the reasons for your statements or view. You
should try and convince the reader of your point of view.
• Name
Describe briefly without giving details.
• Sketch/outline
Emphasise the major features, structures or general principles of a topic, omitting
minor details. It requires slightly more detail than in the case of naming, listing or
giving information.
• State
Provide the required information without discussing it.
• Summarise
Give a structured overview of the key (most important) elements of a topic. This
should always be done in your own words.

vii
Study map for the management of the shares portfolio
In this map each key topic is listed in an individual study section:

MANAGEMENT OF SHARES

Fundamental Analysis Analysis of graphs Technical analysis

1. Calculations 1. Introduction 1. Market strength indicators
 EPS  Trends  Oversold/ Overbought
 P/E ratio  Bar charts  Stochastic indicators
 Dividend yield  Line charts  Relative strength index
 Return on equity  Point & figure charts  Williams %R, Bollinger bands
2. Economic environment 2. Graphical formations 2. Moving average indicators
 GDP  Key reversal days  Moving Average
 Confidence  Heads & shoulders  MACD
 Indicators  Wedges  Exponential moving average
 Gaps 3. Volume

viii
Icons

Time allocation Learning outcomes

Assessment /
Study material
Assignments

Individual exercise Group Activity

Example Reflection

Warning against plagiarism

ASSIGNMENTS ARE INDIVIDUAL TASKS AND NOT GROUP ACTIVITIES.
(UNLESS EXPLICITLY INDICATED AS GROUP ACTIVITIES)
Copying of text from other learners or from other sources (for instance the study guide,
prescribed material or directly from the internet) is not allowed – only brief quotations
are allowed and then only if indicated as such.
You should reformulate existing text and use your own words to explain what you
have read. It is not acceptable to retype existing text and just acknowledge the source
in a footnote – you should be able to relate the idea or concept, without repeating the
original author to the letter.
The aim of the assignments is not the reproduction of existing material, but to ascertain
whether you have the ability to integrate existing texts, add your own interpretation
and/or critique of the texts and offer a creative solution to existing problems.
Be warned: students who submit copied text will obtain a mark of zero for the
assignment and disciplinary steps may be taken by the Faculty and/or
University. It is also unacceptable to do somebody else’s work, to lend your work
to them or to make your work available to them to copy – be careful and do not
make your work available to anyone!
Plagiarism is a serious offence and you should familiarise yourself with the
plagiarism policy of the NWU. http://library.nwu.ac.za/copyright-and-plagiarism
Please refer to the Policy on Academic Integrity which is found on the following
website: http://www.nwu.ac.za/sites/www.nwu.ac.za/files/files/i-governance-
management/policy/2P-2.4.3.2_Academic%20integrity_e.pdf

ix
x
 Study unit 1

Study unit 1
THE INVESTMENT BACKGROUND

Study outcomes
Upon completion of this study unit, you should be able to:
• distinguish between wealth, investment, speculation and gambling;
• analyse the fundamental principles of investment;
• discuss the investment management process;
• measure risk and return in the valuation process;
• understand the different theories used in investment theory to value assets;
• analyse the time value of money and techniques used to derive the future and
present value;
• incorporate the time value of money techniques to derive the future and present
value of investments;
• understand valuation concepts and the input variables for the valuation
process; and;
• valuate financial securities.

Introductory statements
The goal of this study unit is to introduce you to the concept of investment, the
investment management process and the techniques to value different types of asset
classes.

Study material
Chapters 1, 2, 3, 4 and 5 of your prescribed textbook form the study material of this
study unit.

1
Study unit 1

Study section 1.1

The investment setting
Study material
Chapter 1 of your prescribed textbook forms the study material for this study section.

Study outcomes
In this study section you will:
• Distinguish between wealth, investment, speculation and gambling.
• Explain and calculate the required rate of return.
• Analyse and apply the fundamental principles of investment.
• Explain diversification based on different asset classes.
• Discuss the investment management process.

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 1.1, you should be able to complete the following questions successfully:
1. Distinguish between wealth, investment, speculation and gambling.
2. Explain required rate of return.
3. Define the time value of money.
4. Discuss risk versus return.
5. Apply the different measures of risk of a single asset.
6. Distinguish between the various asset classes.
7. Discuss the risk/ return characteristics of the various asset classes.
8. Discuss international diversification.
9. Discuss the investment management process.

2
 Study unit 1

Study section 1.2

Organisation and functioning of securities markets
Study material
Chapter 2 of your prescribed textbook forms the study material for this study section.

Study material
In this study section you will:
• Examine the characteristics of well-functioning securities markets.
• Explore the differences between primary and secondary markets.
• Investigate how markets operate.
• Understand how indices are calculated.

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 1.2, you should be able to complete the following questions successfully:
1. Discuss the characteristics of well-functioning securities markets.
2. Explain the differences between primary and secondary markets.
3. Discuss market structures and how markets operate.
4. Discuss the South African Securities markets.
5. What are the uses of market indices?
6. Define market indices and explain how indices are calculated.

3
Study unit 1

Study section 1.3

Developments in investment theory
Study material
Chapter 3 of your prescribed textbook forms the study material for this study section.

Study outcomes
In this study section you will:
• Examine the efficient market theory and the three forms of the efficient market
hypothesis.
• Examine the investment theory and use Markowitz’s modern portfolio theory to
explain risk aversion.
• Examine the pricing theory models and use the capital asset pricing model to
identify risk factors faced by investors.
• Understand the way in which investors specify and measure risk and return in
the valuation process.
• Examine the basic assumptions of investor behaviour.
• Examine how these models can be used to value assets.

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 1.3, you should be able to complete the following questions successfully:
1. How do investors specify and measure risk and return in the valuation process
from an investment theory point of view?
2. Explain the security market line and its relation to risk and return.
3. What are the assumptions of the efficient market?
4. Discuss the three forms of the efficient market hypothesis and the implications
of the efficient market theory.
5. Explain risk aversion using Markowitz’s modern portfolio theory.
6. Explain the basic assumptions of investor behaviour.
7. What are the assumptions of the capital asset pricing model (CAPM)?
8. Discuss the capital market line (CML) and the difference between the CML and
security market line.
9. What are the assumptions of the arbitrage pricing theory (APT)?
10. Compare CAPM and APT.

4
 Study unit 1

Study section 1.4

The time value of money
Study material
Chapter 4 of your prescribed textbook forms the study material for this study section.

Study outcomes
In this study section you will:
• Examine and calculate the difference between nominal and effective interest
rates.
• Understand the concepts of future value and present value.
• Calculate the future value and present value of investments.
• Explore the variations of future and present value techniques.
• Determine the net present value and internal rate of return.

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 1.4, you should be able to complete the following questions successfully:
1. Illustrate the relationship between nominal and effective interest rates.
2. Understand the concepts of future value with specific reference to annual
compounding, intra-year compounding and the future value of an annuity.
3. Explain the relationship between future value and present value.
4. Understand the concepts of present value with specific reference to a single
amount, a mixed stream, perpetuity and an annuity.
5. Explain the variations of future and present value techniques.
6. Determine the net present value and internal rate of return.

5
Study unit 1

Study section 1.5

Valuation principles and practices
Study material
Chapter 5 of your prescribed textbook forms the study material for this study section.

Study outcomes
In this study section you will:
• Examine different valuation concepts e.g. par value, market value, book value,
and fair value.
• Examine the required input variables to the valuation process.
• Valuate financial securities by means of the constant growth model, the two
stage dividend discount model, the three stage dividend discount model, and
the no growth model.

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 1.5, you should be able to complete the following questions successfully:
1. Explain the following valuation concepts: Par value, Market value, Book value
and Fair value.
2. Discuss the required input variables for valuation purposes.
3. Discuss the valuation of the following financial securities:
 Bond valuation
 Preference shares
 Ordinary shares
 Investment trusts

6
 Study unit 2

Study unit 2
EQUITY ANALYSIS

Study outcomes
Upon completion of this study unit, you should be able to:
• explain the three-step valuation process of fundamental analysis;
• examine the global and domestic economy and the role of exchange rates;
• discuss the business cycle and prediction indicators;
• examine how investors can use financial data as inputs into company analysis;
• discuss the various techniques of financial analysis;
• understand the different measures of value added, models and relative
valuation ratios;
• discuss the advantages and limitations of technical analysis;
• explain and apply the different technical analysis tools;
• discuss the challenges to technical analysis.

Introductory statements
The goal of this study unit is to equip you with the necessary knowledge to apply
fundamental analysis and technical analysis to equity.

Study material
Chapters 6, 7, 8, 9 and 10 of your prescribed textbook form the study material for this
study unit.

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Study unit 2

Study section 2.1

Fundamental analysis
Study material
Chapter 6 of your prescribed textbook forms the study material for this study section.

Study outcomes
In this study section you will:
• Examine and graphically illustrate the three-step valuation process of
fundamental analysis.
• Explore the methods used for economic forecasting e.g. leading economic
indicators, economic forecasting models, and market signals.
• Examine the key factors used in macroeconomic analysis e.g. GDP, interest
rates, inflation, budget deficit, balance of payments, exchange rates, and
unemployment rates.
• Briefly explore industry analysis and company analysis.

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 2.1, you should be able to complete the following questions successfully:
1. Explain the three-step valuation process of fundamental analysis.
2. Discuss the methods used for economic forecasting.
3. Discuss the key factors used in macroeconomic analysis.
4. Explain industry analysis and company analysis.

8
 Study unit 2

Study section 2.2

Industry analysis
Study material
Chapter 7 of your prescribed textbook forms the study material for this study section.

Study outcomes
In this study section you will:
• Examine the global economy in which a company operates.
• Examine the global- and domestic economy and the role of exchange rates.
• Examine the business cycle and investigate the indicators that can assist in its
prediction.
• Explore the methods used in determining the reference turning point of the
business cycle.
• Explore industries relationship to the business cycle and the industry life cycle.
• Graphically illustrate the industry life cycle.
• Understand the industry structure and its performance with reference to
Michael Porter’s industry forces model.

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 2.2, you should be able to complete the following questions successfully:
1. Explain how the global and domestic economy influences the industry in which
a firm operates and why the exchange rate has such an enormous influence.
2. Discuss the importance of the business cycle in industry analysis.
3. Discuss the indicators that can assist in predicting the business cycle.
4. Discuss the methods used in determining the reference turning point of the
business cycle in South Africa.
5. Define an industry.
6. Explain what is meant by ‘the sensitivity of an industry to the business cycle’.
7. What are the factors determining the sensitivity of a company’s earnings to the
business cycle.
8. Discuss the different stages associated with the industry life cycle.

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Study unit 2

9. Discuss the different forces a company has to deal with as outlined by the
industry forces model.
10. Explain Porter’s generic competitive strategies, which can enhance an
organisation’s competitive advantage.
11. What is SWOT analysis?

10
 Study unit 2

Study section 2.3

Company analysis
Study material
Chapter 8 of your prescribed textbook forms the study material for this study section.

Study outcomes
In this study section you will:
• Examine how investors can use financial data as inputs into company analysis
e.g. Income Statement, Balance Sheet and Cash Flow Statement.
• Explore the various techniques of financial analysis, including ratio analysis and
the DuPont system of analysis.

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 2.3, you should be able to complete the following questions successfully:
1. Name the basic sources of financial data.
2. Explain the difference between capital costs and revenue costs.
3. Explain the purpose of a balance sheet and its structure.
4. Explain the purpose of a cash flow statement and why it is regarded as a
requirement.
5. Explain the primary categories of a statement of cash flows.
6. Discuss the basic steps of effective cash flow management.
7. Discuss the three types of financial analysis an analyst may use to assess the
financial health of a company.
8. Explain liquidity ratios, financial leverage ratios, asset management, profitability
ratios and market value measures.
9. Explain the DuPont model and its significance as analysis technique.
10. What is leasing and which types of leases can a firm embark upon.
11. What are the advantages of leases?

11
Study unit 2

Study section 2.4

Company valuation
Study material
Chapter 9 of your prescribed textbook forms the study material for this study section.

Study outcomes
In this study section you will:
• Examine the different investment styles when investing in companies.
• Apply the different measures of value added.
• Examine the earnings multiplier model.
• Apply the dividend growth models to value growth shares.
• Apply alternative growth models to value shares e.g. the H-model.
• Explore the advantages and limitations of dividend discount valuation models.
• Apply relative valuation ratios to assess the value of a firm and their shares.

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 2.4, you should be able to complete the following questions successfully:
1. Discuss the different investment styles when investing in companies.
2. Explain the concept of value added.
3. Distinguish between economic profit and economic value added.
4. Discuss cash value added and the concept of strategic investments.
5. What is meant by ‘market value added’?
6. Explain the sources of value added.
7. What are the variables that determine an industry or market multiplier?
8. Which implications does the earnings model have regarding the behaviour of
P/E ratios?
9. Discuss the following alternative growth models: Two-stage dividend discount
model, H-model, three-stage dividend discount model and growth duration
model.
10. What are the advantages and limitations of dividend discount valuation models.
11. Explain the following relative valuation ratios: price/earnings ratio, dividend
yields, price/sales ratios, price/asset value ratios, and price/cash flow ratio.

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 Study unit 2

Study section 2.5

Technical analysis
Study material
Chapter 10 of your prescribed textbook forms the study material for this study
section.

Study outcomes
In this study section you will:
• Understand the underlying assumptions applicable to technical analysis.
• Examine the basic charts which act as foundation of technical analysis.
• Explore the indicators used in technical analysis.
• Examine moving averages as technical analysis tool.
• Distinguish between leading and lagging indicators.
• Examine the Dow Theory and its assumptions.
• Investigate the use of the overbought/oversold oscillator.
• Investigate line studies as technical analysis tool.
• Explore market indicators as technical analysis tool and the different categories
associated with it.
• Understand the challenges to technical analysis by doing the practical
application.

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 2.5, you should be able to complete the following questions successfully.
1. Discuss the underlying assumptions applicable to technical analysis.
2. Explain price fields and volume in technical analysis.
3. Explain open interest, the rules for interpreting open interest, and what it means
in rising markets and declining markets.
4. Why is the time element important in technical analysis?
5. Discuss moving averages as technical analysis tool.
6. Explain the difference between leading and lagging indicators.
7. Discuss the Dow Theory with specific reference to its six assumptions.
8. Explain the overbought/oversold oscillator and its importance to technical
analysis.

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Study unit 2

9. Name three line studies used as technical analysis tools and what each
consists of.
10. Discuss market indicators and its different categories as technical analysis tool.
11. Explain the challenges to technical analysis.

14
 Study unit 3

Study unit 3
PORTFOLIO MANAGEMENT

Study outcomes
Upon completion of this study unit, you should be able to:
• illustrate the significant elements of portfolio management and discuss the
basic principles of the portfolio management process;
• discuss the objectives and constraints of portfolio management;
• construct a portfolio of assets and measure its return and risk;
• discuss equity- and bond portfolio management strategies;
• discuss the fundamental issues in performance measurement;
• examine and utilise the major traditional methods for calculating risk-adjusted
portfolio performance.

Introductory statements
The goal of this study unit is to examine portfolio management, and its principles in
context of the risk/return relationship that exist between assets when creating a
portfolio of assets. Specific measurement techniques are examined in order to create
optimum portfolio performance. Various strategies can be embarked upon in the quest
for optimal portfolio performance.

Study material
Chapters 13 and 15 of your prescribed textbook form the study material for this study
section.

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Study unit 3

Study section 3.1

Portfolio management
Study material
Chapter 13 of your prescribed textbook forms the study material for this study
section.

Study outcomes
In this study section you will:
• Examine the objectives and constraints of portfolio management.
• Graphically illustrate and discuss the life cycle of an individual.
• Examine general portfolio construction by means of measuring individual- and
portfolio return and risk.
• Examine general portfolio construction by means of measuring correlation and
optimal asset allocation.
• Examine equity- and bond portfolio management strategies by means of
passive- and active management.

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 3.1, you should be able to answer the following questions successfully:
1. Explain the life cycle theory in portfolio management.
2. Discuss the objectives and constraints of portfolio management.
3. Explain the importance of asset allocation.
4. Explain the concept of diversification.
5. Distinguish between policy asset allocation and tactical asset allocation.
6. How is risk and return measured in the portfolio management context?
7. Discuss the equity portfolio management strategies.
8. Discuss the fixed interest-bearing security portfolio management strategies.

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 Study unit 3

Study section 3.2

Evaluation of portfolio management
Study material
Chapter 15 of you prescribed textbook forms the study material for this study section.

Study outcomes
In this study section you will:
• Examine the fundamental issues in performance measurement.
• Examine the major traditional methods for calculating risk-adjusted portfolio
performance e.g. Treynor’s Performance Index, Sharpe’s Performance Index,
and Jensen’s Alpha Measure.
• Practically illustrate the risk-adjusted portfolio performance

Individual activity
Self-evaluation
In order to ensure that you have sufficiently mastered the study material in study
section 3.2, you should be able to answer the following questions successfully:
1. Discuss the fundamental issues in performance measurement.
2. Name and explain the different traditional methods for calculating risk-adjusted
portfolio performance.
3. Compare the different traditional methods for calculating risk-adjusted portfolio
performance.
4. Discuss the components, which can be applied to performance attribution
analysis.

Concluding remark
Thank you very much that you have registered for this module. May you utilise and
apply the study content in your future work place.

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