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Investments An Introduction Seventh Edition

Investments An Introduction Seventh Edition. By: Herbert B. Mayo The College of New Jersey. Chapter 1. An Introduction to Investments. Introduction of Portfolio Construction. Income is either spent or saved Savings are invested The investments constitute a portfolio

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Investments An Introduction Seventh Edition

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  1. InvestmentsAn IntroductionSeventh Edition By: Herbert B. MayoThe College of New Jersey

  2. Chapter 1 An Introduction to Investments

  3. 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

  4. 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

  5. Preliminary Definitions • Investments: lay usage v. economics • Primary and secondary markets • Value and valuation

  6. Preliminary Definitions • Return: income and capital gains • Return: monetary units and percentages • Risk: differentiated from speculation • Marketability versus liquidity

  7. Sources of Risk Total Risk Systematic (nondiversifiable) Unsystematic (diversifiable) • Market • Interest Rate • Reinvestment • Purchasing Power • Exchange Rate • Business • Financial

  8. Diversification and Unsystematic Risk • Diversification reduces (or eliminates) unsystematic risk • Unsystematic risk is asset specific

  9. Diversification and Unsystematic Risk • For firms, unsystematic risk refers to business risk and financial risk • Diversification does not reduce systematic risk

  10. Efficient Markets • Financial markets are efficient because • fierce competition exists among investors • participants may readily enter and exit financial markets • information is readily available

  11. Efficient Markets • Efficient markets implies • the investor should not expect to consistently outperform the market

  12. 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

  13. The Internet • Major source of information concerning investments • Information is often available for little or no cost • Problem of inaccurate information

  14. The Importance of • Beliefs • Investment philosophy • Understanding yourself • Available time to make investment decisions • The investor's resources

  15. Appendix 1 Supply and Demand

  16. Supply and Demand Determine Price • An equilibrium price occurs when: • quantity demanded = quantity supplied • At equilibrium - no incentive for the price to change

  17. 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

  18. Supply of a Good or Service Depends on Several Variables • The price of the good • The cost of production • The level of technology

  19. The Interaction Between Supply and Demand

  20. The Interaction Between Supply and Demand • The equilibrium price equates the quantity demanded and the quantity supplied

  21. Effect of a Lower Price - Excess Demand

  22. Effect of a Higher Price - Excess Supply

  23. 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

  24. An Increase in Demand

  25. 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

  26. An Increase in Supply

  27. 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

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