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FINC4101 Investment Analysis

FINC4101 Investment Analysis. Instructor: Dr. Leng Ling Chapter 1: Course Introduction. Investment. The current commitment of money or other resources in the expectation of deriving future benefits. Examples: Buying 100 shares of Google. Taking this course.

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FINC4101 Investment Analysis

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  1. FINC4101 Investment Analysis Instructor: Dr. Leng Ling Chapter 1: Course Introduction

  2. Investment • The current commitment of money or other resources in the expectation of deriving future benefits. Examples: • Buying 100 shares of Google. • Taking this course. In this course, we will look at many types of investments.

  3. Financial assets vs. Real assets • In this course, we study investments in financial assets. • Financial asset: A claim on income (cash flow) generated by a real asset. • Examples: stocks, bonds. • Real asset: An asset used to produce goods and services and thereby generate cash flow. • Examples: factories, equipment, land/real estate, commodities buildings, knowledge. • Investors may invest in both financial and real assets. • “Financial assets”, “assets” and “securities” will be used interchangeably.

  4. Types of financial assets Three broad types of financial assets: • Fixed-income securities • Equity securities • Derivative securities

  5. Fixed-income security • A fixed-income security pays: • A stream of fixed cash flows (e.g., fixed coupon bond) OR • A stream of cash flows that is determined according to a specified formula (e.g., floating-rate bond) • Fixed-income securities differ in terms of maturity, payment method, and risk.

  6. Equity security • An ownership share in a corporation. • Also called “common stock” or simply “equity”. • Cash flows from holding equity security: • Dividends paid by the company. • Proceeds from eventual sale. • These cash flows are highly uncertain.

  7. Derivative security • Provides payoffs/cash flows that are determined by the prices of other assets such as bond or stock prices. • E.g., call option on a share of Intel’s stock with an exercise price of $30 and an expiration date of Dec 31,2006. • Gives holder the right to buy Intel at $30 on or before expiration.

  8. Investment process • When people invest, they buy a collection of assets (financial & real assets). Such a collection is called a “portfolio”. • The way in which an investor goes about constructing the portfolio is called the “investment process”. • Investment process requires investor to make two types of decisions: • Asset allocation • Security selection

  9. Markets are competitive • Financial markets are highly competitive. • Investors/analysts search markets looking for the best buys. • No-free-lunch: should not expect securities that are so underpriced that they represent obvious bargains. • Risk-return trade-off • Higher risk assets are priced to offer higher expected returns than lower-risk assets. • Market efficiency • Security prices reflect all relevant information available to investors.

  10. Concept Map

  11. Summary • Definition of investment • Financial asset vs. real asset • Types of financial assets • Financial markets are highly competitive. • Topics covered.

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