INVESTMENTS
6th Edition
Sharpe, Alexander, and Bailey
POWER POINT PRESENTATIONS PREPARED BY
JOSEPH F. GRECO, Ph.D.
CHAPTER ONE
INTRODUCTION
THE INVESTMENT ENVIRONMENT
What are securities?
•
Definition: a legal representation of the right to received prospective futurebenefits under stated conditions.
THE INVESTMENT ENVIRONMENT
•
Calculating the RATE OF RETURN :r = (p
1- p
0)/ p
0where
r = the rate of return
p
0= the beginning price
p
1= the ending price
THE INVESTMENT ENVIRONMENT
Types of Securities:
•
Treasury bills•
Long term bonds•
Common stocksTHE 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.THE INVESTMENT ENVIRONMENT
Security Markets:
•
Function: meeting place for buyers and sellers•
Types of Markets based on Issuer:
Primary
SecondaryTHE INVESTMENT ENVIRONMENT
Financial
Intermediaries
•
Functions:issue financial claims against themselves
•
Types:commercial banks
savings and loans
savings banks
credit unions
life insurance companies
mutual funds
pension funds
THE INVESTMENT PROCESS
FIVE STEPS:
•
Set investment policy•
Perform security analysis•
Construct a portfolio•
Revise the portfolio•
Evaluateperformance
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 categoriesStep 2: Security Analysis
•
Using potential investment categories, find mispriced securities•
Using fundamental analysis
intrinsic value should equal discounted present value•
Compare current market price to true market valueStep 3: Construct a Portfolio
IDENTIFY SPECIFIC ASSETS AND
PROPORTION OF WEALTH IN WHICH TO INVEST
ADDRESS ISSUES OF
•
SELECTIVITY•
TIMING•
DIVERSIFICATIONStep 4: Portfolio Revision
Periodically repeat Step 3
Revise if necessary
•
increase/decrease existing securities•
delete some securities•
add new securitiesStep 5: Portfolio
Performance Evaluation
Involves periodic determination of
portfolio performance with respect to risk and return
