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INVESTMENTS 6th Edition Sharpe, Alexander, and Bailey

This presentation covers the investment environment, including securities, risk, return, and diversification. It also outlines the investment process, including setting investment policy, security analysis, constructing a portfolio, revising the portfolio, and evaluating performance.

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INVESTMENTS 6th Edition Sharpe, Alexander, and Bailey

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  1. INVESTMENTS6th EditionSharpe, Alexander, and Bailey POWER POINT PRESENTATIONS PREPARED BY JOSEPH F. GRECO, Ph.D. CALIFORNIA STATE UNIVERSITY, FULLERTON

  2. CHAPTER ONE INTRODUCTION

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

  4. 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

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

  6. 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.

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

  8. 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 ENVIRONMENT

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

  10. 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

  11. 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 securities

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

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

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

  15. END OF CHAPTER 1

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