INVESTMENTS 6th Edition Sharpe, Alexander, and Bailey

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INVESTMENTS6th EditionSharpe, 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 investors 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
  value
• 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
• Assignment
• P17, 1?3?4?5?18?22