Professional Documents
Culture Documents
CH 01
CH 01
Learning Objectives
Define investment and discuss what it means to
study investments.
Explain why risk and return are the two critical
decision process.
Investments Defined
Investments is the study of the process of
securities Concepts also apply to real assets Foreign financial assets should not be ignored
Investment Objectives
Primary Objectives
Investment Constraints
Possible constraints for investors include:
Legal Moral / Ethical Emotional including investment knowledge and risk
tolerance Basic minimum income to be provided by the portfolio Realism an understanding that some objectives are unrealistic (e.g., high returns with low risk) Other (e.g., illness, pending divorce, etc.)
three primary investment objectives of safety, income, and growth, and to the secondary objectives of liquidity and tax minimization.
The importance of safety relates to: risk, market timing,
inflation, return, and emotion The importance of income relates to: taxation, return, risk, inflation, and basic minimum income The importance of growth relates to: taxation, risk, return, market timing, and emotional considerations
sometime
Individuals need sound framework for managing and
increasing wealth
Essential part of a career in the field
Security analyst, portfolio manager, investment
Investment Decisions
Underlying investment decisions: the tradeoff between
expected return and risk Return: expected return is not usually the same as realized return Risk: the possibility that the realized return will be different than the expected return
a cost lower expected returns (ER) Any level of expected return and risk can be attained
Stocks
ER
Bonds
Typical Chart
RT
RELATION
RISQUE-RENDEME
High
10
Real estate (commercial) Common shares Real estate (residential) Preferred shares Corporate bonds Government bonds
Rendement
Expected Return 6
4
Treasury bills
0 0 Low 2 4 6
Risk
10
12
High
Security analysis
Necessary to understand security characteristics and applied to these securities to estimate their price or value Selected securities viewed as a single unit How and when should it be revised? How should portfolio performance be measured?
Portfolio management
process
return and/or reduce risk Investors must now cope with a changed investing environment Internet changes investments environment Institutional investors are important How efficient are financial markets in processing new information?
Corporate Governance
Main issues: The accountability of the Board of Directors and Management A re-examination of accounting and auditing practices Management compensation arrangements such as executive stock option plans Disclosure requirements The effectiveness of existing regulatory bodies