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McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill ... McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill ... Presentation Transcript

  • Chapter 1 The Investment Setting
  • Investment Defined
    • The commitment of current funds in anticipation of receiving a larger future flow of funds.
    1-
  • Financial vs. Real Assets
    • Financial Asset
      • Financial claim on an asset
    • Real Asset
      • Tangible asset that may be seen, felt, held, or collected
    1-
  • Forms of Investment 1-
  • The setting of investment objectives
    • Risk and Safety of Principal
    • Current Income versus Capital Appreciation
    • Liquidity Considerations
    • Short-Term versus Long-Term Orientation
    • Tax Factors
    • Ease of Management
    • Retirement and Estate Planning Considerations
    1-
  • Risk and Safety of Principal
    • A BIG QUESTION:
      • What factors can affect the value of your portfolio?
    1-
  • Risk and Safety of Principal
    • ANSWER:
      • Anything that happens during the day, e.g.
        • A snow storm in the Midwest
        • Congressional testimony by Ben Bernanke
        • Surprise earnings announcements
        • Anything to do with
            • Finance
            • Economics
            • Legal issues
            • Investors’ psychology
            • New scientific discoveries
            • Politics
            • War
    1-
  • Risk and Safety of Principal
    • Risk is the variability in the expected return
      • High return with high risk
        • Aggressive investors
          • Pork belly options or futures
      • Low return with low risk
        • Conservative investors
          • Bank Saving accounts, CD’s, T-Bills, T-Notes, and T-Bonds
    1-
  • Current Income vs. Capital Appreciation (trade-off)
    • Current income
      • Objective: Income NOT growth
        • Bond Interests and stock dividends
        • High-yielding utilities, mature industries, …
    • Capital appreciation
      • Objective: Price gains NOT income
        • Increase in value - NO cash dividends
        • High growth industries
    1-
  • Liquidity Considerations
    • Liquidity is measured by the ability to convert an investment quickly into cash at fair market value
    1-
  • Other Liquidity Factors
    • Transaction costs
    • Commissions
    • Difference between “bid” and “ask” price
    • Alternative investment opportunities with higher/unusual expected returns
      • Arbitrage
      • EXAMPLES – (with hindsight!) IPO’s of
        • Microsoft
        • Amazon.com
        • eBay
    1-
  • Short-Term versus Long-Term Orientation
    • Short term (one year or less)
    • Intermediate term (between 1 to 10 years)
    • Long term (over 10 years)
    • Diversification of maturity dates
    1-
  • SHORT TERM PESPECTIVE
    • Traders
      • Short term market tactics
        • Investment horizon = days, hours, or seconds
      • Technical analysis
        • Market indicator series
        • Charting
        • Moving averages
        • Ceilings, floors, turning points,…
    1-
  • LONG TERM PESPECTIVE
    • Investors
      • Buy and hold
      • Fundamental analysis
        • Growth rate in sales, market share,…
        • Earnings per share (EPS), profit margin,…
        • Financial Statement Analysis
          • Balance sheet
          • Income statement
          • Cash flow statement
    1-
  • Tax Factors
    • High tax brackets
      • Municipal bonds
        • Tax free
      • Real estate
        • Depreciation & interest write-offs
      • Tax credits
      • Tax shelters
    1-
  • Ease of Management
    • “ Professional investment managers” vs. “do-it-yourself approach”
      • Manager’s fee versus possible higher return
      • Opportunity costs
      • Time needed to analyze, choose, & manage
      • Psychic income
      • Leisure time
    1-
  • Retirement and Estate Planning Considerations
    • When is the best time to start a retirement plan?
    • As early as possible
      • TAX BENEFIT
      • COMPOUNDING EFFECT
    • Other factors:
      • Personal or family obligations
      • Legal issues
    1-
  • EXAMPLE - Calculating the dollar Amount of Retirement Funds Using Excel
    • Please click on the Excel icon
    1-
  • Inflation
    • General increase in prices for goods and services
    • Purchasing power falls
    • Example: If inflation = 2%, then a $1 pack of gum will cost $1.02 in a year.
    1-
  • Inflation – Why should I worry? Impact of 6% inflation over 20 years 1- Please click on Excel icon– sample calculation
  • CALCULATING THE RATE OF RETURN IN PERCENTAGE 1- Measures of Risk and Return
  • P 1 = Price at the end of the period P 0 = Price at the beginning of the period D 1 = Dividend income 1- Measures of Risk and Return
  • P 1 = $22 P 0 = $20 D 1 = $1 1- Measures of Risk and Return
  • RISK – comparing investments
    • Uncertainty associated with outcomes from an investment
    • The higher the risk, the higher the expected return (compensation)
    • Greater uncertainty displayed with wider dispersion
      • Higher variance and higher standard deviation
    1-
  • Examples of Risk 1-
  • RISK – of a security relative to the market expressed as beta 1- beta β Implication β = 1 Move in tandem with the market β >1 More risk than the market β <1 Less risk than the market
  • Actual Consideration of Required Return
    • The real rate of return.
    • The anticipated inflation factor.
    • The risk premium .
    1-
  • Real Rate of Return
    • The return investors require for allowing others to use their money
    • The annual percentage return realized on an investment
      • Before inflation
      • Before consideration of risk
    1-
  • Anticipated Inflation Factor
    • Inflation factor added to the real rate of return
    1-
  • Anticipated Inflation Factor
    • Example: 2% real-rate-of-return
    • 3% anticipated rate of inflation
    1-
  • Risk Premium
    • Extra return over the risk free rate to compensate for market risk A higher rate of return is required to entice investors into a riskier investment
    1-
  • Three Key Components of Total Required Rate of Return 1-
  • Three Key Components of Total Required Rate of Return 1-
  • Risk-Return Characteristics 1-
  • Compound Annual Rates of Return by Decade (in percent) 1-
  • Appendix 1A: Career Opportunities in Investments
    • Stockbroker
    • Security Analyst
    • Portfolio Manager
    • Mergers and Acquisitions
    • Investment Banker
    • Financial Planner
    1-
  • 30 Largest U.S. Brokerage Houses 1-
  • Topics Covered in CFA Exams 1-
  • 1- WEBSITE COMMENT http://www.mhhe.com/hirtblock9e Web site for this textbook provides valuable student resources. http://www.aaii.com A non profit website educating do it yourself investors. www.nasdaq.com Provides information about Nasdaq stocks and bonds. www.nyse.com Provides information about New York Stock Exchange, listings and regulations. www.nareit.com Provides information and data about real estate investment trusts. www.quicken.com Provides understandable coverage of financial planning and investing
  • 1- WEBSITE COMMENT www.investopedia.com Provides a general education site about stock and investing. www.amex.com Provides information about corporate and government bonds. www.dfin.com Provides job search links, loan calculator, financial links, and educational links. www.investorwords.com Provides links to finance sites and glossary of finance technology. www.business.com Provides a searchable database http://www.nasdaqtrader.com www.attain.com
  • 1- WEBSITE COMMENT www.morningstar.com Contains evaluations of and information about stocks and mutual funds. www.bondmarkets.com Provides information about corporate and government bonds www.moneyadvisor.com Provides insurance-based financial calculators and links to financial institutions www.reuters.com Contains business and financial market news for United States and other countries www.instinet.com Four largest electronic communication networks ECNs http://www.nextrade.com/
  • 1- WEBSITE COMMENT http://www.iclub.com Provides information and education for investment club members. http://web.utk.edu/~jwachowi/part2.html Created by finance professor with links to information resources. http://www.bloombergtradebook.com