FINA 2802: Investments and Portfolio Analysis Course Overview Dragon Yongjun Tang January 12, 2010

2 Why do I care?

3 Balance Sheet – U.S. Households

4 The Courage to Be Rich This will be the best course you ever take! (financially speaking.) This will be the best course you ever take! (financially speaking.)

5 Plan for today Introduction Introduction Learning objectives Learning objectives Grading policies Grading policies Class schedule Class schedule Lecture 1: Investment Background Lecture 1: Investment Background

My teaching style No-nonsense No-nonsense Practical, informative, first-hand experience Practical, informative, first-hand experience Not for exam-takers Not for exam-takers A lot extra credit opportunities A lot extra credit opportunities Easy to get A for serious investors Easy to get A for serious investors 6

7 Who is he?

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12 Learn from the gurus Success breeds success Success breeds success Strive for the best Strive for the best Be creative Be creative

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15 “It's not what we don't know that prevents us from succeeding; it's what we know that just ain't so that is our greatest obstacle.” --- Josh Billings

16 Lecture 1: Background and Issues Reading: Chapter 1 Reading: Chapter 1 Practice Problem Sets: 1,2,4,5,7,9,11,14,16 Practice Problem Sets: 1,2,4,5,7,9,11,14,16

17 Objectives Define “Investment” Distinguish between real assets and financial assets. Describe the major steps in the construction of a portfolio. Identify major participants in financial markets. Recent trends

18 Investment Current commitment Current commitment Future benefit Future benefit

19 Investment What major investments have you ever made?

20 Investment Vehicles Real assets Real assets Financial assets Financial assets Financial assets are means to distribute the consumption of real assets.

21 Type of Financial Assets Financial Market Fixed-income (Bonds) Equity (Stocks) Derivatives FIN 0804 FINA 2802 (This course) FINA 0301

22 Role of Financial Assets Information Content Transfer of Consumption through time Allocation of Risk Separation ownership/control - Agency Problems

23 The Investment Process Asset allocation Asset allocation Security selection Security selection Risk-return trade-off Risk-return trade-off Market efficiency Market efficiency Active (bottom-up) vs. passive (top-down) management Active (bottom-up) vs. passive (top-down) management

24 30s70%30% 40s s s4060 Common AgeStocksBonds Example of Asset Allocation

25 Example of Security Selection Your Stock Portfolio AutoRetailFinancial Wal-Mart Nordstroms Espirit Bank of China Berkshire Hathaway HSBC

26 There is no free lunch!

27 Market Efficiency Security prices accurately reflect all relevant information. Security prices accurately reflect all relevant information. How many efficient market theorists does it take to change a light bulb?

28 Market Efficiency How many efficient market theorists does it take to change a light bulb? None! If the light bulb needs to be changed, someone else must have already done it.

29 Players in the Financial Markets Business Firms – net borrowers Business Firms – net borrowers Households – net savers Households – net savers Governments – can be both borrowers and savers Governments – can be both borrowers and savers Investment Bankers Investment Bankers

30 Recent Trends Globalization Securitization Financial Engineering Computer Networks

Hong Kong up 60% in

Decision Making 1. Perceive the situation 2. Possible actions 3. Evaluate the outcomes 4. Choose the action with the best outcome Which is the most important? 32

33 Summary Financial assets Financial assets Risk return tradeoff Risk return tradeoff Next class: Financial Securities Next class: Financial Securities