1. INVESTMENTS 6th Edition Sharpe, Alexander, and Bailey
POWER POINT PRESENTATIONS
PREPARED BY
JOSEPH F. GRECO, Ph.D.
CALIFORNIA STATE UNIVERSITY, FULLERTON

2. CHAPTER ONE
INTRODUCTION

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

4. THE INVESTMENT ENVIRONMENT
Calculating the RATE OF RETURN :
r = (p1 - p0)/ p0
where
r = the rate of return
p0 = the beginning price
p1 = the ending price

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

6. 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.

7. THE INVESTMENT ENVIRONMENT
Security Markets:
Function: meeting place for buyers and sellers
Types of Markets based on Issuer:
Primary
Secondary

8. THE INVESTMENT ENVIRONMENT
Financial Intermediaries
Functions:
issue financial claims against themselves
Types:
commercial banks
savings and loans
savings banks
credit unions
life insurance companies
mutual funds
pension funds

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

10. 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

11. 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 securities

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

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

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

15. END OF CHAPTER 1