1 Topic I ： Background and Issues Investments

2 What is an investment ? Is hiding money in a mattress or keeping it in a piggy bank an investment ? No! The “safe-keeping” of money does not involve any expected compensation.

3 What is an investment ? How about baseball Possibly, but compensation is highly uncertain, and some of the value of ownership may be “sentimental” rather than financial in nature. cards or Beanie Babies? Are they an investment?

4  pure time value of money→  expected rate of inflation→  investment risk (risk premium) → What is an investment ?

5 Return and Risk

6 Measuring Returns Dollar Returns V T =Income+ΔP (1)HPR = (2)HPY = HPR – 1 Alternatives (i) V 0 =$250 V T =$350 in 2 yrs (ii) V 0 =$100 V T =$112 in 6 mos (3)Annual HPR =HPR 1/N (4)Annual HPY =HPR 1/N – 1

7 Measuring Historic Returns ─AM vs. GM RA = RG = (πHPR) 1/N Year Beginning Value Ending Value HPR HPY

8 Year Beginning Value Ending Value HPR HPY

9 Sources of Returns Income Price Change Reinvestment of income / price changes p.29 Exhibit 2.4

10 Measuring Portfolio Returns 0.095$21,900,000 $20,000,000 Total ,500, ,000, ,000C ,200, ,000, ,000B % 1.20 $1,200,000$12$1,000,000$10100,000A Weighted HPY Market Weight HPY HPR Ending Market Value Ending Price Beginning Market Value Beginning Price Number of Shares Investment COMPUTATION OF HOLDING PERIOD YEILD FOR A PORTFOLIO

11 Economic ConditionsProbabilityRate of Return Strong economy, no inflation Weak economy, above － average inflation No major change in economy Measuring Returns ─ Uncertainty

12 Measuring Risk (I) 變異數 (Variance) 2 標準差 (Standard Deviation)

13 Measuring Risk (Π) 變異係數 (Coefficient of Variation) CV = or Markowitz 平均數－變異數法則

14 Measuring Risk (III) Range R max – R min Semivariance 2 β 係數 (Cov of returns w/ the mkt portfolio) β=β=

15 投資組合之期望報酬與風險 投資組合期望報酬 投資組合之變異數 當 n = 2 if

16 Sources of Risk Business risk Financial risk Liquidity risk Exchange rate risk Country risk Systematic Risk vs. Unsystematic Risk  Risk premium

17 Conclusion: 風險性資產必要報酬率 RP

18 Issues

19 Issues That Investors Should Always Consider There is a trade-off between risk and expected return Developed financial markets are nearly efficient. Focus on after-tax returns, net of expenses. Diversify across asset types, industries, and even countries.

20 What types of investments can one make? Real assets vs. Financial assets  Tangible assets vs. Claims on assets Direct vs. Indirect financial investments  Individual securities vs. “pools” of assets Derivatives  Futures, options

21 THE ASSET ALLOCATION DECISION

22 What is asset allocation? The process of deciding how to distribute wealth among asset classes, sectors, and countries for investment purposes. Not an isolated choice, but rather a component of the portfolio management process.

23 Managing Risk Since risk drives expected return, investing involves managing risk rather than managing return.

24 Risk Management Strategies Risk Avoidance Risk Anticipation Risk Transfer Risk Reduction

25 Individual Investor Life Cycle p.134 Exhibit5.1

26 The Portfolio Management Process (I) A four step process: 1. Construct a policy statement 2. Study current financial conditions and forecast future trends 3. Construct a portfolio 4. Monitor needs and conditions

27 p.136 Exhibit5.3 The Portfolio Management Process (Π)

28 p.140 Exhibit5.4 The Policy Statement

29 p.141 Exhibit5.5 The Policy Statement

30 Basic Investment Philosophies In forming an investment portfolio, several questions are paramount: In what types of securities should I invest? Within each security type, how do I select which assets to purchase? Finally, how active should I manage my portfolio?

31 Asset AllocationSecurity Selection ActiveMarket timingStock picking PassiveMaintain pre- determined allocation(s) Try to track a well-known market index Summarizing the Basic Strategies

32 Globalization Securitization Financial Engineering bundling － hybrid security unbundling － IOs & POs Computerizes trading Recent Trends

33 Ethics in Investments Financial markets are vitally important to a well-functioning economy. Trust in information and faith in fairness are essential. Codes of ethics for financial professionals and strict regulations attempt to create such an environment where financial markets can efficiently fulfill their economic function.

34 Jobs in Investments Sales  Registered representative of a brokerage firm  Financial planners Investment Analysis and Portfolio Management  Brokerage firms, banks, money managers, mutual fund managers, insurance companies Professional Designations  Chartered Financial Analyst (CFA)  Certified Financial Planner (CFP)