INVESTMENTS 6 th Edition Sharpe Alexander and Bailey

INVESTMENTS 6 th Edition Sharpe, Alexander, and Bailey POWER POINT PRESENTATIONS PREPARED BY JOSEPH F. GRECO, Ph. D. CALIFORNIA STATE UNIVERSITY, FULLERTON

CHAPTER ONE INTRODUCTION

THE INVESTMENT ENVIRONMENT n What are securities? • Definition: a legal representation of the right to received prospective future benefits under stated conditions.

THE INVESTMENT ENVIRONMENT • Calculating the RATE OF RETURN : r = (p 1 - p 0)/ p 0 where r = the rate of return p 0 = the beginning price p 1 = the ending price

THE INVESTMENT ENVIRONMENT n Types of Securities: • Treasury bills • Long term bonds • Common stocks

THE INVESTMENT ENVIRONMENT n Risk, Return, and Diversification • The Fundamental Principle 3 combining securities in a portfolio 3 results in a lower level of risk 3 than a simple average of the risks of each.

THE INVESTMENT ENVIRONMENT n Security Markets: • Function: meeting place for buyers and sellers • Types of Markets based on Issuer: 3 Primary 3 Secondary

THE INVESTMENT ENVIRONMENT n Financial Intermediaries • Functions: issue financial claims against themselves • Types: 3 commercial banks 3 savings and loans 3 savings banks 3 credit unions 3 life insurance companies 3 mutual funds 3 pension funds

THE INVESTMENT PROCESS n FIVE STEPS: • Set investment policy • Perform security • • • analysis Construct a portfolio Revise the portfolio Evaluate performance

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

Step 2: Security Analysis • Using potential investment categories, find mispriced securities • Using fundamental analysis 3 intrinsic value should equal discounted present value • Compare current market price to true market value • Identify undervalued securities

Step 3: Construct a Portfolio IDENTIFY SPECIFIC ASSETS AND PROPORTION OF WEALTH IN WHICH TO INVEST n ADDRESS ISSUES OF n • SELECTIVITY • TIMING • DIVERSIFICATION

Step 4: Portfolio Revision Periodically repeat Step 3 n Revise if necessary n • increase/decrease existing securities • delete some securities • add new securities

Step 5: Portfolio Performance Evaluation Involves periodic determination of portfolio performance with respect to risk and return n Requires appropriate measures of risk and return n

END OF CHAPTER 1