Professional Documents
Culture Documents
Investment Setting
Investment Setting
Chapter 1 Questions
What is an investment ?
What are the components of the
required rate of return on an
investment?
What key issues should investors
always consider?
What types of investments can one
make?
Chapter 1 Questions
Where do U.S. investors place funds for
investment and savings purposes?
What are some basic investment
philosophies that individual and institutional
investors follow?
Why are ethics and regulations a concern to
all investment professionals?
What are some career paths available for
persons interested in investments?
What is an investment ?
An investment is the current commitment
of resources for a period of time in the
expectation of receiving future
resources greater than the current
outlay.
What is an investment ?
Is hiding money in a
mattress or keeping
it in a piggy bank an
investment ?
No! The safekeeping of money
does not involve any
expected
compensation.
What is an investment ?
How about baseball
cards or Beanie
Babies? Are they an
investment?
Possibly, but
compensation is highly
uncertain, and some of
the value of ownership
may be sentimental
rather than financial in
nature.
Components Of The
Required Rate of Return
In order to part with their money,
investors require compensation for:
the
Compensation for
expected inflation:
If the future payment will be diminished in
value because of inflation, then
investors will demand an interest rate
higher than the real risk-free interest
rate so that their expected purchasing
power will actually increase.
Risk-Return Trade-Off
Because investors tend to be risk averse,
it makes sense that they will only take
on riskier investments if they expect to
earn more than with lower risk
investments.
Market Efficiency
An efficient market is one where
So
Implications of Market
Efficiency
Its what is unexpected that moves the
market (the genuinely new information
in news).
We should be skeptical of investment
strategies that claim to be able to beat
the market on a consistent basis.
Diversify, Diversify,
Diversify
Dont put all of your
eggs in one basket!
Diversification
reduces risk without
necessarily
sacrificing expected
return.
Its a no-brainer!
What types of
investments can one
make?
Derivatives
Futures,
options
Where do U.S.
households invest?
All over the map!
But in recent years, there has been a
shift toward longer term investing
through retirement accounts, mutual
funds, and stocks.
Basic Investment
Philosophies
In forming an investment portfolio, several
questions are paramount:
In what types of securities should I invest?
Asset Allocation
Security Selection
Security
Selection
Active
Market timing
Stock picking
Passive
Maintain predetermined
allocation(s)
Try to track a
well-known
market index
Ethics in Investments
Financial markets are vitally important to a
well-functioning economy.
Trust in information and faith in fairness are
essential.
Codes of ethics for financial professionals
and strict regulations attempt to create such
an environment where financial markets can
efficiently fulfill their economic function.
Jobs in Investments
Sales
Registered representative of a brokerage firm
Financial planners
Professional Designations
Chartered Financial Analyst (CFA)
Certified Financial Planner (CFP)