INVESTMENTS 6th Edition Sharpe, Alexander, and BaileyCHAPTER ONETHE INVESTMENT ENVIRONMENTSlide 4Slide 5Slide 6Slide 7Slide 8THE INVESTMENT PROCESSSTEP 1: Investment PolicyStep 2: Security AnalysisStep 3: Construct a PortfolioStep 4: Portfolio RevisionStep 5: Portfolio Performance EvaluationPowerPoint PresentationINVESTMENTS6th EditionSharpe, Alexander, and BaileyPOWER POINT PRESENTATIONS PREPARED BYJOSEPH F. GRECO, Ph.D.CALIFORNIA STATE UNIVERSITY, FULLERTONCHAPTER ONEINTRODUCTIONTHE INVESTMENT ENVIRONMENTWhat 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 = (p1 - p0)/ p0where r = the rate of returnp0 = the beginning price p1 = the ending priceTHE INVESTMENT ENVIRONMENTTypes of Securities:•Treasury bills•Long term bonds•Common stocksTHE INVESTMENT ENVIRONMENTRisk, Return, and Diversification•The Fundamental Principle combining securities in a portfolioresults in a lower level of riskthan a simple average of the risks of each.THE INVESTMENT ENVIRONMENTSecurity Markets:•Function: meeting place for buyers and sellers •Types of Markets based on Issuer:PrimarySecondaryTHE INVESTMENT ENVIRONMENTFinancial Intermediaries•Functions:issue financial claims against themselves•Types:commercial bankssavings and loanssavings bankscredit unionslife insurance companiesmutual fundspension fundsTHE INVESTMENT PROCESSFIVE STEPS:•Set investment policy•Perform security analysis•Construct a portfolio•Revise the portfolio•Evaluate performanceSTEP 1: Investment Policy•Identify investor’s unique objective•Determine amount of investable wealth•State objectives in terms of risk and return•Identify potential investment categoriesStep 2: Security Analysis•Using potential investment categories, find mispriced securities•Using fundamental analysisintrinsic value should equal discounted present value•Compare current market price to true market value•Identify undervalued securitiesStep 3: Construct a PortfolioIDENTIFY SPECIFIC ASSETS AND PROPORTION OF WEALTH IN WHICH TO INVESTADDRESS ISSUES OF•SELECTIVITY•TIMING•DIVERSIFICATIONStep 4: Portfolio RevisionPeriodically repeat Step 3Revise if necessary•increase/decrease existing securities•delete some securities•add new securitiesStep 5: Portfolio Performance EvaluationInvolves periodic determination of portfolio performance with respect to risk and returnRequires appropriate measures of risk and returnEND OF CHAPTER
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