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FUNDAMENTALS OF INVESTMENTS 3 rd Edition Sharpe, Alexander, and Bailey

FUNDAMENTALS OF INVESTMENTS 3 rd Edition Sharpe, Alexander, and Bailey. Power Point Presentations prepared By Joseph F. Greco, Ph.D. California State University, Fullerton. Chapter One. Introduction. The Investment Environment. What are securities?

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FUNDAMENTALS OF INVESTMENTS 3 rd Edition Sharpe, Alexander, and Bailey

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  1. FUNDAMENTALS OF INVESTMENTS3rd EditionSharpe, 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. Five steps: Set investment policy Perform security analysis Construct a portfolio Revise the portfolio Evaluate performance The Investment Process

  9. 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

  10. 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

  11. Step 3: Construct a Portfolio • Identify specific assets and proportion of wealth in which to invest • Address issues of • Selectivity • Timing • Diversification

  12. Step 4: Portfolio Revision • Periodically repeat step 3 • Revise if necessary • Increase/decrease existing securities • Delete some securities • Add new securities

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

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