INVESTMENTS 6th Edition Sharpe, Alexander, and Bailey POWER POINT PRESENTATIONS.

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INVESTMENTS 6th Edition Sharpe, Alexander, and Bailey POWER POINT PRESENTATIONS

Transcript of INVESTMENTS 6th Edition Sharpe, Alexander, and Bailey POWER POINT PRESENTATIONS.

Page 1: INVESTMENTS 6th Edition Sharpe, Alexander, and Bailey POWER POINT PRESENTATIONS.

INVESTMENTS6th Edition

Sharpe, Alexander, and Bailey

POWER POINT PRESENTATIONS

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CHAPTER ONE

INTRODUCTION

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INTRODUCTION

• The investment environment– encompasses the kinds of marketable securities that

exist and where and how they are bought and sold.

• The investment process– Is concerned with how an investor should proceed in

making decisions about what marketable securities to invest in,how extensive the investment should be ,and when the investments should be made.

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THE INVESTMENT ENVIRONMENT

• Securities

• Security markets

• Financial intermediaries

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THE INVESTMENT ENVIRONMENT

• What are securities?–Definition: a legal representation of the right

to received prospective future benefits under stated conditions.

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THE INVESTMENT ENVIRONMENT

–Calculating the RATE OF RETURN :

r = (p1 - p0)/ p0

where

r = the rate of return

p0 = the beginning price

p1 = the ending price

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THE INVESTMENT ENVIRONMENT

• Types of Securities:–Treasury bills

–Long term bonds

–Common stocks

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THE INVESTMENT ENVIRONMENT

• Risk, Return, and Diversification–The Fundamental Principle

• combining securities in a portfolio

• results in a lower level of risk

• than a simple average of the risks of each.

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THE INVESTMENT ENVIRONMENT

• Security Markets:–Function: meeting place for buyers and

sellers

–Types of Markets based on Issuer:• Primary Secondary

– Seasoned new issue

– Unseasoned new issue

Money market capital market

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THE INVESTMENT ENVIRONMENT

• Financial Intermediaries– Functions:

issue financial claims against themselves

– Types:• commercial banks

• savings and loans

• savings banks

• credit unions

• Use the proceeds from this issuance to purchase primarily the financial assets of others

• life insurance companies

• mutual funds

• pension funds

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THE INVESTMENT PROCESS

• FIVE STEPS:– Set investment policy

– Perform security analysis

– Construct a portfolio

– Revise the portfolio

– Evaluate performance

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STEP 1: Investment Policy

–Identify investor’s unique objective

–Determine amount of investable wealth

–State objectives in terms of risk and return

–Identify potential investment categories

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Step 2: Security Analysis

–Using potential investment categories,

find mispriced securities

–Using fundamental analysis• intrinsic value should equal discounted present val

ue

• Compare current market price to true market value

• Identify undervalued\overvalued securities

–Using technical analysis

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Step 3: Construct a Portfolio

• IDENTIFY SPECIFIC ASSETS AND PROPORTION OF WEALTH IN WHICH TO INVEST

• ADDRESS ISSUES OF–SELECTIVITY

–TIMING

–DIVERSIFICATION

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Step 4: Portfolio Revision

• Periodically repeat Step 3

• Revise if necessary– increase/decrease existing securities

–delete some securities

–add new securities

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Step 5: Portfolio Performance Evaluation

• Involves periodic determination of portfolio performance with respect to risk and return

• Requires appropriate measures of risk and return

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END OF CHAPTER 1

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