Investments An Introduction Seventh Edition By Herbert B
Investments An Introduction Seventh Edition By: Herbert B. Mayo The College of New Jersey Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Chapter 1 An Introduction to Investments Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Introduction of Portfolio Construction • • Income is either spent or saved Savings are invested The investments constitute a portfolio The composition of a portfolio depends on investment goals • Not all assets are appropriate for each financial goal Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Possible Investment Goals • Funds to meet emergencies • Funds to finance education expenses • Funds to make a specified purchase (e. g. , a home) • Funds for retirement Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Preliminary Definitions • Investments: lay usage v. economics • Primary and secondary markets • Value and valuation Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Preliminary Definitions • Return: income and capital gains • Return: monetary units and percentages • Risk: differentiated from speculation • Marketability versus liquidity Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Sources of Risk Total Risk Unsystematic (diversifiable) • Business • Financial Systematic (nondiversifiable) • Market • Interest Rate • Reinvestment • Purchasing Power • Exchange Rate Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Diversification and Unsystematic Risk • Diversification reduces (or eliminates) unsystematic risk • Unsystematic risk is asset specific Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Diversification and Unsystematic Risk • For firms, unsystematic risk refers to business risk and financial risk • Diversification does not reduce systematic risk Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Efficient Markets • Financial markets are efficient because – fierce competition exists among investors – participants may readily enter and exit financial markets – information is readily available Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Efficient Markets • Efficient markets implies –the investor should not expect to consistently outperform the market Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Portfolio Assessment • Popular press places emphasis on return • Higher return requires accepting more risk • Assessment should consider both the return and the risk taken to achieve the return Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
The Internet • Major source of information concerning investments • Information is often available for little or no cost • Problem of inaccurate information Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
The Importance of • Beliefs • Investment philosophy • Understanding yourself • Available time to make investment decisions • The investor's resources Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Appendix 1 Supply and Demand Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Supply and Demand Determine Price • An equilibrium price occurs when: – quantity demanded = quantity supplied • At equilibrium - no incentive for the price to change Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Demand for a Good or Service Depends on Several Variables • The price of the good • Consumer tastes • Prices of substitute and complementary goods • Consumer incomes Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Supply of a Good or Service Depends on Several Variables • The price of the good • The cost of production • The level of technology Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
The Interaction Between Supply and Demand Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
The Interaction Between Supply and Demand • The equilibrium price equates the quantity demanded and the quantity supplied Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Effect of a Lower Price Excess Demand Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Effect of a Higher Price Excess Supply Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Demand & Supply Graphs • Relate price and quantity • All other factors are held constant • If any of these variables change, the demand curve or the supply curve shifts • The shift causes the quantity and price to change Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
An Increase in Demand Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
An Increase in Demand • Causes the price to rise and the quantity supplied to also increase • A decrease in demand has the opposite effect - the price and the quantity supplied fall Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
An Increase in Supply Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
An Increase in Supply • Causes the price to fall and the quantity demanded to increase • A decrease in supply causes prices to rise and the quantity demanded to fall Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
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