INVESTMENTS 6th Edition Sharpe, Alexander, and Bailey POWER POINT PRESENTATIONS

CHAPTER ONE INTRODUCTION

The investment environment –encompasses the kinds of marketable securities that exist and where and how they are bought and sold. The investment process –Is concerned with how an investor should proceed in making decisions about what marketable securities to invest in,how extensive the investment should be,and when the investments should be made.

THE INVESTMENT ENVIRONMENT Securities Security markets Financial intermediaries

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

THE INVESTMENT ENVIRONMENT – Calculating the RATE OF RETURN : r = (p 1 - p 0 )/ p 0 where r = the rate of return p 0 =the beginning price p 1 = the ending price

THE INVESTMENT ENVIRONMENT Types of Securities: – Treasury bills – Long term bonds – Common stocks

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.

THE INVESTMENT ENVIRONMENT Security Markets: – Function: meeting place for buyers and sellers – Types of Markets based on Issuer: Primary Secondary – Seasoned new issue – Unseasoned new issue Money market capital market

THE INVESTMENT ENVIRONMENT Financial Intermediaries – Functions: issue financial claims against themselves – Types: commercial banks savings and loans savings banks credit unions Use the proceeds from this issuance to purchase primarily the financial assets of others life insurance companies mutual funds pension funds

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

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

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\overvalued securities – Using technical analysis

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

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

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

END OF CHAPTER 1 Assignment ： P17 ， 1 、 3 、 4 、 5 、 18 、 22