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  1. 1. Updated on 28/07/2009 FINANCIAL PLANNING ASSOCIATION OF MALAYSIA CFP SYLLABUS MODULE 4 INVESTMENT PLANNING Course Objectives To understand the concepts of risk and return, the financial markets and instruments, and the basic concepts and tools of asset valuation and portfolio management. The aim is to be able to evaluate alternative investments, the advantages and disadvantages, and to make suitable investment recommendations to clients. Course Outline Topic 1: Basic Concepts of Investment • Return (dividend, interest, capital gain), Holding Period Return (HPR),Annualized HPR and the measurement of historical return and expected return • Risk (business, market, economic, political, etc.), division of risk • Adjusted rate of return (real rate of return considering inflation) • Risk-return relationship - using model (CAPM) 1 and graph (Security Market Line - SML), risk-profiles of investors and risk-return trade off on different asset classes • Importance of risk management - concept of diversification • Other factors that affect investments such as cost, liquidity and taxation Candidates should be able to understand the concepts of risk and return in regards to investment, to broadly rank the various types of investments according to the general degree of risk and to briefly evaluate the investment instruments in regard to their costs, liquidity, safety and taxation. Topic 2: Financial Mathematics and Statistics • Time value of money (simple and compound interest, present and future value, annuities) - Application of TVM on financial or investment decisions • Basic statistical concepts (data collection and presentation, mean and standard deviation, probability theory and distributions) • Computation on ‘missing cash flows’ Candidates should be able to understand and calculate simple interest, compound interest, present value, future value and annuities. Candidates should also be able to 1 CAPM refers to Capital Asset Pricing Model in which systematic risk of an investment is determined using beta (β) 1
  2. 2. Updated on 28/07/2009 have knowledge of elementary statistics, data collection and analysis, mean and standard deviation, probability theory and distributions. Topic 3: Financial Statement Analysis • Accounting concepts and principles • Balance sheet (analysis of inventories, working capital, fixed asset, long-term liabilities, off-balance-sheet activities) • Profit and loss statement • Financial statement analysis could also include Economic Value Added (EVA) - measuring the performance of management and Market Value Added (MVA) – measuring market value less capital invested in a firm • Cashflow statement • The commonly used financial ratios (return on investment, return on equity, inventory turnover ratio, current ratio, debt equity ratio, etc.), price ratios (Price Earnings Ratio, Price over NTA ratio etc) Candidates should be able to understand the major accounting rules and principles and to read and interpret the financial statements. Candidates should also be able to calculate and analyze the various key financial ratios and know how to use these ratios to compare companies and note the limitations of financial ratios. Topic 4: Investment in Shares • Types of shares • Structure of the Bursa Malaysia • Trading mechanisms (how to buy and sell share, settlement procedures, costs, liquidity) • Public listing of companies • Takeovers and mergers • Other international markets and instruments • Factors to consider when investing in foreign markets (currency risk, liquidity, custody, taxation, etc.) • Discussion on functions of stock market to the economy, the concept of primary market (Initial Public Offering) and secondary market, component stocks of the Kuala Lumpur Composite Index • Differences between various indices available for benchmarking (including the Syariah Indices) • Theoretical x-price of shares after the implementation of rights or bonus issue or both, stocks split, stock dividend and risk in investing in stocks Candidates should have a working knowledge of the Malaysian stock market and instruments, how share are listed, bought and sold, the types of shares and investment instruments available, and the effect of bonus issue, right issue and takeover on stock prices. Candidates should also have a reasonable understanding of other major international stock markets and instruments. Candidates should be able to know the use of market indices and the various methods of constructing market indices. 2
  3. 3. Updated on 28/07/2009 Topics 5: Basics of Equity Valuation • Fundamental analysis (sector/industry analysis, company analysis) • Basic valuation tools (P/E, dividend yield, P/NAV, etc.) • Technical analysis (major chart patterns, support and resistance, trendline and channels) Candidates should also be able to have a working knowledge of the analysis of equity, able to calculate P/E, dividend yield, P/NAV and use these ratios to compare companies and note the limitations in using these ratios. Candidates should also have a basic understanding of technical analysis. Traditional and operational approaches to fundamental analysis would form an important part of the topic. The discussion on equity valuation is to be expanded to two models, namely the Present Value Model and Relative Valuation Model. Present Value Model can be further divided into 1) Dividend Discount Model (DDM), also known as Gordon Growth Model and 2) Discounted Cash Flow (DCF) Model. Due to the importance of expected dividend in company valuation using DDM, while dividend payment depends on growth of a company, the discussion on growth can be further divided into constant, zero and non-constant growth. The Relative Valuation Method, apart from comparing between companies in the same industry, should also compare the valuation of a company with industry average. Topic 6: Investment in Bonds or Fixed Income Securities • Basic characteristics of bonds (coupon, maturity, duration, modified duration, yield, convexity, estimation on new bond price and volatility on changes on interest rates using Modified Duration) • Types of bonds (government, corporate, mortgage-backed securities, asset- backed securities, zero-coupon) • Primary and secondary markets • Major rating agencies and how bonds are rated • Yield curve • Calculation of bond’s value and yield, calculation of yield to call, call price and the concepts of premium, discount, par on bonds, current yield and capital gains yield • Factors affecting bond prices (interest rate, inflation, exchange rate, credit, liquidity) Candidates should be able to understand what are bonds, the various types of bonds available to investors, how bonds are traded, the major participants in the bond markets, bond rating, and the difference between high-grade bonds and junk bonds. 3
  4. 4. Updated on 28/07/2009 Candidates should be able to have a basic knowledge of how bond’s value and yield are calculated, and factors affecting bond prices. Topic 7: Derivatives • The characteristics of financial futures • Types of futures contracts (index, interest rate, etc.) • General Discussion on derivatives contracts • Trading strategies (speculating, hedging and arbitraging) • The basics of options (call, put, strike price, in-the-money, out-of-the- money) • Characteristics and basics of convertibles and combination securities • Types of margins • Option Moneyness2, intrinsic value and time value • Warrants (equity warrants and call warrants) using Black Scholes Option Pricing Model (BSOPM) • Risk management via hedging covering hedging ratios and contracts Candidates should be able to understand what are derivatives, able to distinguish between speculation and hedging, and know the risks involved in derivatives. Topic 8: Unit Trusts • Concepts of units trusts (trust deed, role of manager, trustee, unit holders) • Benefits of unit trusts • Types of unit trusts available • Regulation of the unit trust industry • Risk classification • Performance comparison (absolute, risk-adjusted, Sharpe ratio, Micropal ranking, Treynor ratio, Jensen Alpha and Risk Adjusted Performance (RAP)) • Pricing and costs (front-end fee, realization charge, load vs. no-load, management fee, expense ratio) • How to select unit trusts - (NAV) of unit trust fund, benchmarking used in comparing unit trust funds performance, general performance of local unit trust funds, factors influencing funds performance, differences between unit trust fund (offered by unit trust management company) and investment- linked fund (unit trust fund that managed by insurance companies - refers to fund with insurance protection offered to unit holders), unit trust funds offered by third-party providers • Unit splits and dividends • Advantages of dollar cost averaging • Implications of tax and inflation on unit trust investment 2 Option Moneyness (OM) refers to whether the call is profitable when exercise. OM can be divided into in-the money (ITM), out-of-the money (OTM) or at-the-money (ATM). The FPAM syllabus only mentioned ITM and ATM and it is suggested the term OM to be used in the syllabus 4
  5. 5. Updated on 28/07/2009 • The Unit Trusts Guidelines which have direct impact on unit trust industry • Withdrawal procedures involving withdrawal of savings by depositors from their Employees Provident Fund (EPF) accounts to approved investment management companies for investing in unit trust funds • Understanding the operations of Syariah based unit trusts • Understanding the Code of Ethics which govern the unit trust industry and standards of professional conduct • Servicing and marketing unit trusts Candidates should be able to understand the benefits of investing in unit trusts, the different types of unit trusts, and how to analyze, compare and choose unit trusts that meet client’s requirement taking into consideration client’s objective, risk tolerance and time horizon. The tax and inflation implications of investing in unit trusts should also be considered. Topic 9: Real Estate • Basic characteristic of real estate as an investment • Valuation techniques commonly used in real estate • Real estate cycles • Factors influencing prices of real estates • Concept of property trusts • Real Estate Investment Trusts (REIT) available for investment on Bursa Malaysia as alternative to real estate investment Candidates should have an overview of the characteristics of real estate investment, the return and the risk, the real estate cycles, the concept of property trusts, so that they can advise clients considering including real estate in their investment portfolios. Topic 10: Basic Concepts of Portfolio Management • Asset allocation process (setting objectives, identifying constraints, assessing opportunities, determining asset mix, etc.) • Different investment styles (top-down vs. bottom-up, active vs. passive) • Efficient market theory • Risk/return analysis • Concept and benefits of diversification • Efficient frontier • Performance measurement (benchmark, performance attribution analysis) • Capital Asset Pricing Model, classes of assets in portfolio management, investment mandate for portfolio managers according to policy statement, trade-off between risk and return among different asset classes in portfolio, computation of market indexes, performance measurement according to Tracking Error – applies only on Index Fund i.e. passive management fund, expected return of portfolio, risk on expected return of portfolio – covering 5
  6. 6. Updated on 28/07/2009 two asset class and three asset class portfolio, and computation of portfolio beta. Candidates should be able to have a basic understanding of the portfolio management process, the importance of diversification among different asset classes, characteristics of the efficient frontier, the different investment styles of professional fund managers and how to evaluate performance. 6
  7. 7. Updated on 28/07/2009 Financial Planning Association of Malaysia Recommended Reading List for Module 4 – Investment Planning Type Title Book Block, Hirt (2005), Foundations of Financial Management, 11th Edition, Mc Graw Hill (2005) Kapoor, Dlabay, Hughes (2204), Personal Finance, 7th Edition, Mc Graw Hill (2004) Brigham, Houston (2004), Fundamentals of Financial Management, 10th Edition, Thomson South-Western (2004) Harrison (2002), Personal Financial Planner, 2nd Edition, Prentice Hall (2002) Ross, Westerfield, Jordan (2006), Corporate Finance Fundamentals, 7th Edition, Mc Graw Hill (2006) Gitman (2006), Principles of Managerial Finance, 11th Edition, Pearson Addison Wesley (2006) Brealey, Myers, Marcus (2004), Fundamentals of Corporate Finance, 4th Edition, Mc Graw Hill (2004) Lee Hock Lock (2001), Financial Security in Old Age -Whither The Employees Provident Fund of Malaysia?, Pelanduk Publications (2001) Corrado, Jordan (2005), Fundamentals of Investments, Valuation and Management, 3rd Edition, Mc Graw Hill (2005) – Module 4 only Jones (2004), Investments Analysis and Management, 9th Edition, Wiley (2004) – Module 4 only Reilly, Norton (2003), Investments, 6th Edition, Thomson South- Western (2003) – Module 4 only Reilly, Brown (2003), Investment Analysis and Portfolio Management, 7th Edition, Thomson South-Western (2003) – Module 4 only Bacha, Obiyathulla (2002), Financial Derivatives : Markets and Application in Malaysia, UPM Press (2002) – Module 4 only 7
  8. 8. Updated on 28/07/2009 Type Title Book 3 Damodaran (2002), Investment Valuation, Tools and Techniques for Determining the Value of Any Asset, 2nd Edition, Wiley (2002) – Module 4 only Type Title Articles 60 short essays compilation in ‘Investing Your Savings”, a book written by Yeoh Keat Seng Type Organization Web Address Webs Federation of Investment Managers Malaysia Bursa Malaysia Securities Commission of Malaysia Bank Negara Malaysia Relevant Journals 3 A highly recommended book for valuation of any assets 8