FIN 352: Investments 26-01-2014 18:07:00

Professor Grigg
Email: ase!"grigg#s$n"e%$
&ffie: '( 4122 ) *-11am
&ne +a,ter a -ee.
Investments
/+! %o -e st$%! investments0
P+iloso,+ies an% t+o$g+ts
Goo% %eisions
Finanial 1o2s
3ealisti e4,etations an% goals
5o avoi% sams
In t+e 1*706s managing mone! -as ver! im,ortant
Defined benefit: 7,ension8 firms9em,lo!ees manage !o$r retirement
Peo,le %i%n6t +ave to ma.e t+eir investments 2! t+emselves"
:eisions ma%e 2! em,lo!er"
It -as +ange 2ea$se it -as ris.!:
- 5+e! -o$l% still +ave to ,a! t+e em,lo!ees even t+o$g+ t+e! -ent
2an.r$,t
- 5+e! -ante% to get t+eir ris. off of t+eir 2alane s+eets; instea% t+e
em,lo!ees too. all t+e ris. t+emselves"
In 1**0< it 2eame 4017=8940329I3>6s 7retirement ,lan8 -+ere !o$
manage !o$r mone! 2! !o$rself"
:eisions are ma%e 2! t+e em,lo!ee"
?ernie )a%+off
Pon@i s+eme:
14A 7e4am,le8 ret$rns ever! !ear on sto.s
It -asn6t realisti 2ea$se t+e +istorial average ret$rn -as 8A
7e4am,le8
>n investment is:
Bommitting f$n%s to one or more assets over a ,erio% of time
Investments
Finanial >ssets: IntangibleC sto.sC 2on%s
)ar.eta2le: Dto.sC 2on%sC >lternative9ot+er %erivatives E--- FOCUS ON
FIN. MARK. SECURITIES
3eal >ssets: TangibleC ,ro,ert!C gol%C lan%
/+at is )ar.eta2le0
- Easil! an% F$i.l! ,$r+ase or sol%
- Go- ommission
- 5ransate% on e4+ange 7NHDE8
- )inimal ,rie im,at9%ist$r2ane
/+at -o$l% sare ,eo,le0
If 50A of (a-aii is 2eing sol% an% t+e sto.s -o$l% ,ro2a2l! %erease in
val$e" It is a2o$t t+e si@e of t+e asset t+at !o$ are selling or 2$!ing" If
onl! 1 ,erson sol% t+eir s+are of (a-aii of 5A t+en ,eo,le -o$l%n6t 2e
sare% t+at t+e sto.s -o$l% go %o-n"
Portfolio

5+in. in terms of t+e Ientire ,ortfolioI

Bolletion of assets: Dto.sC 2on%sC +o$seC 2oat an% ot+er assets from

I3> ao$nt

5+e 1$n. 2ag of all !o$r st$ff 2asiall!

/+ere %o -e get t+e mone! 7finane8 to reate a ,ortfolio0

- Inome -J savings
- Goan
- Dell ot+er assets
- In+eritane
Bareers in t+e finanial fiel%s
Investment 2an.ing: raise a,ital 7mone!8 for or,oration
:e2t a,ital
EF$it! a,ital
Portfolio manager: manage assets for someoneC famil!C firm et"
BFP: Bertifie% Finanial Planner
Finanial ,lanning: in%ivi%$alsC ,eo,le
BF>: B+artere% Finanial >nal!st
Fo$ses on investments: managing m$t$al f$n%sC se$rit! anal!stC +e%ge
f$n%
5ra%e off

K5+e Great tra%e-offK: 5+e e4,ete% ret$rn an% ris."

E4,ete% ret$rn: E738C E4 >nteC Ln.no-n
3eali@e% ret$rn: E4 ,ostC =no-n

3is. an% ret$rn +ave a %iret orrelation

Risk:
:efine% as t+e %ifferene 2et-een t+e e4,ete% ret$rn an% reali@e%
ret$rn"
E4am,le: 5raffi" E4,et 20min traffiC st$. for 28min"
/i%e %is,ersion 7%istri2$tion or varia2ilit!8 +as more ris."
- Go-er stan%ar% %eviation is 2etter"
Narro- %is,ersion 7%istri2$tion or varia2ilit!8 is less ris.!"
- (ig+er stan%ar% %eviation is more ris.!"
3is. 3et$rn 5ra%e-off
- 3is.-aversion means t+at I am -illing to ta.e more ris. if I get
om,ensate% for it"
- 5+e E4 Post slo,e o$l% 2e a %o-n-ar% slo,eC 2ea$se t+e ris. mig+t
+ave 2een great 2$t !o$ onl! got a lo- ret$rn"
- 3is.-free asset 73F8: -+ere t+ere is N& ris.C 2$t !o$Mll get a little ret$rnC
e4am,le 5reas$r! ?ill or 5reas$r! ?on%"
Investment Proess
18 >nal!sis: In%ivi%$al se$rit! anal!sisC li.e anal!@e a sto."
- Intrinsi val$e N 5+e -ort+ of t+e s+are t+at !o$ t+in. itMs -ort+
E4am,le: I?) !o$ t+in. itMs -ort+ 200C an% t+e liste% ,rie is 180"
5+en !o$ -o$l% 2$! itC 2ea$se t+e ,rie is less t+an !o$r -ort+"
- )ar.et ,rie
- E4,ete% ret$rn
- 3is.
28 )anagement: Delet t+e 2a% an% goo% investments into a ,ortfolio
onstr$tion"
B+a,ter 1 26-01-2014 18:07:00
LECTURE NOTES
www.wiley.com/college/ones
Investments
/+! %o -e st$%! investments0
P+iloso,+ies an% t+o$g+ts
Goo% %eisions
Finanial 1o2s
3ealisti e4,etations an% goals
5o avoi% sams
In t+e 1*706s managing mone! -as ver! im,ortant
Defined benefit: 7,ension8 firms9em,lo!ees manage !o$r retirement
Peo,le %i%n6t +ave to ma.e t+eir investments 2! t+emselves"
:eisions ma%e 2! em,lo!er"
It -as +ange 2ea$se it -as ris.!:
- 5+e! -o$l% still +ave to ,a! t+e em,lo!ees even t+o$g+ t+e! -ent
2an.r$,t
- 5+e! -ante% to get t+eir ris. off of t+eir 2alane s+eets; instea% t+e
em,lo!ees too. all t+e ris. t+emselves"
In 1**0< it 2eame 4017=8940329I3>6s 7retirement ,lan8 -+ere !o$
manage !o$r mone! 2! !o$rself"
:eisions are ma%e 2! t+e em,lo!ee"
?ernie )a%+off
Pon@i s+eme:
14A 7e4am,le8 ret$rns ever! !ear on sto.s
It -asn6t realisti 2ea$se t+e +istorial average ret$rn -as 8A 7e4am,le8
>n investment is:
Bommitting f$n%s to one or more assets over a ,erio% of time
Investments
Finanial >ssets: IntangibleC sto.sC 2on%s
)ar.eta2le: Dto.sC 2on%sC >lternative9ot+er %erivatives E--- FOCUS ON
FIN. MARK. SECURITIES
3eal >ssets: TangibleC ,ro,ert!C gol%C lan%
/+at is )ar.eta2le0
- Easil! an% F$i.l! ,$r+ase or sol%
- Go- ommission
- 5ransate% on e4+ange 7NHDE8
- )inimal ,rie im,at9%ist$r2ane
/+at -o$l% sare ,eo,le0
If 50A of (a-aii is 2eing sol% an% t+e sto.s -o$l% ,ro2a2l! %erease in
val$e" It is a2o$t t+e si@e of t+e asset t+at !o$ are selling or 2$!ing" If
onl! 1 ,erson sol% t+eir s+are of (a-aii of 5A t+en ,eo,le -o$l%n6t 2e
sare% t+at t+e sto.s -o$l% go %o-n"
Portfolio

5+in. in terms of t+e Ientire ,ortfolioI

Bolletion of assets: Dto.sC 2on%sC +o$seC 2oat an% ot+er assets from

I3> ao$nt

5+e 1$n. 2ag of all !o$r st$ff 2asiall!

/+ere %o -e get t+e mone! 7finane8 to reate a ,ortfolio0

- Inome -J savings
- Goan
- Dell ot+er assets
- In+eritane
Bareers in t+e finanial fiel%s
Investment 2an.ing: raise a,ital 7mone!8 for or,oration
:e2t a,ital
EF$it! a,ital
Portfolio manager: manage assets for someoneC famil!C firm et"
BFP: Bertifie% Finanial Planner
Finanial ,lanning: in%ivi%$alsC ,eo,le
BF>: B+artere% Finanial >nal!st
Fo$ses on investments: managing m$t$al f$n%sC se$rit! anal!stC +e%ge
f$n%
5ra%e off

K5+e Great tra%e-offK: 5+e e4,ete% ret$rn an% ris."

E4,ete% ret$rn: E738C E4 >nteC Ln.no-n
3eali@e% ret$rn: E4 ,ostC =no-n

3is. an% ret$rn +ave a %iret orrelation

Risk:
:efine% as t+e %ifferene 2et-een t+e e4,ete% ret$rn an% reali@e%
ret$rn"
E4am,le: 5raffi" E4,et 20min traffiC st$. for 28min"
/i%e %is,ersion 7%istri2$tion or varia2ilit!8 +as more ris."
- Go-er stan%ar% %eviation is 2etter"
Narro- %is,ersion 7%istri2$tion or varia2ilit!8 is less ris.!"
- (ig+er stan%ar% %eviation is more ris.!"
3is. 3et$rn 5ra%e-off
- 3is.-aversion means t+at I am -illing to ta.e more ris. if I get
om,ensate% for it"
- 5+e E4 Post slo,e o$l% 2e a %o-n-ar% slo,eC 2ea$se t+e ris. mig+t
+ave 2een great 2$t !o$ onl! got a lo- ret$rn"
- 3is.-free asset 73F8: -+ere t+ere is N& ris.C 2$t !o$Mll get a little ret$rnC
e4am,le 5reas$r! ?ill or 5reas$r! ?on%"
Investment Proess
38 >nal!sis: In%ivi%$al se$rit! anal!sisC li.e anal!@e a sto."
- Intrinsi val$e N 5+e -ort+ of t+e s+are t+at !o$ t+in. itMs -ort+
E4am,le: I?) !o$ t+in. itMs -ort+ 200C an% t+e liste% ,rie is 180" 5+en
!o$ -o$l% 2$! itC 2ea$se t+e ,rie is less t+an !o$r -ort+"
- )ar.et ,rie
- E4,ete% ret$rn
- 3is.
48 )anagement: Delet t+e 2a% an% goo% investments into a ,ortfolio
onstr$tion"
/+o 2$!s investments 7sto.sC 2on%s et"80
Instit$tional investors: Professionall! manages investmentsC e4am,le:
Portfolio managementC +e%ge f$n%s
3etail investors: Non-,ai% or non-,rofessional ,eo,le"
3eg$lation F$ll :islos$re
- 3eg F: is a reg$lation -+i+ states t+at t+ere o$l% 2e no ,rivate
onversations or %is$ssions on val$a2le information"
- >ll information +as to 2e given o$t on an eF$al 2asis %islos$re"
E4am,le: &,en onfress allC 5-itterC
REA!IN"
Investing is:
Investing mone! in ertifiates of %e,ositC 2on%sC ommon sto.C or
m$t$al f$n%s"
/arrantsC ,$ts an% allsC f$t$re ontratsC an% onverti2le se$ritiesC
tangi2le assets 7gol%C real estateC an% olleti2les8
Investment:
:efinition: a ommitment of f$n%s to one or more assets t+at -ill 2e
+el% over some f$t$re time ,erio%
Is onerne% of an investorMs -ealt+
Finanial >ssets:
Pa,er 7or eletroni8 laims on some iss$erC i"e" Fe% government or a
or,oration"
)ar.eta2le se$rities:
>re finanial assets t+at are easil! an% +ea,l! tra%a2le in organi@e%
mar.ets
Portfolio:
Bonsists of t+e asset +ol%ings of an investor
E4am,le: 4sto.sC 3 m$t$al f$n%s
/+! %o -e st$%! investments0
Im,rove o$r -elfare: monetar! -ealt+
3etirement %eision: Delf-%irete% ,lans N +ave to +oose
!o$rself among sto.sC 2on%s et"
4017.8 ,lan: Em,lo!ees ontri2$te a ,erentage of salar! to a
ta4-%eferre% ,lanC an% t+e em,lo!er often mat+es ,art of t+e
ontri2$tion"
In%ivi%$al 3etirement >o$nt 7I3>8:
5+e ,rimar! met+o% to ,rovi%e for retirement"
)$t$al F$n%:
> favorite investment ve+ile of small investors
>re a %riving fore in t+e sto. mar.et
De$rit! anal!sts:
>lso alle% investment anal!st
'o2 is to st$%!C eval$ateC an% reommen% sto.s to investors
3et$rn
Invest to get a ret$rn on t+e mone!
?! +ol%ing as+C !o$ forgo t+e o,,ort$nit! to earn a ret$rn on t+at
as+"
E#$ecte% &et'&n: t+e antii,ate% ret$rn for some f$t$re ,erio%
Re(li)e% &et'&n: t+e at$al ret$rn over some ,ast ,erio%" 5+e at$al
mone! t+eir earne% for investing"
3is.
)ar.eta2le se$rities offering varia2le ret$rns aross times are ris.!"
Risk: 5+e $nertaint! a2o$t t+e at$al ret$rn t+at -ill 2e earne% on an
investment"
5reas$r! 2ill +as no ,ratial ris.C 2ea$se t+ere is little +ane t+at
t+e L"D" government -ill fail to re%eem t+ose o2ligations as t+e!
mat$re in 13-26 -ee.s"
Bommon sto. are F$ite ris.!C 2$t t+e e4,ete% ret$rn mig+t 2e +ig+"
3is.-averse investor: &ne -+o -ill not ass$me ris. sim,l! for its o-n
sa.e an% -ill not in$r an! given level of ris. $nless t+ere is an
e4,etation of a%eF$ate om,ensation for +aving %one so"
3is.-tolerane: Investors -+o +oose to in$r +ig+ levels of ris. -it+
t+e e4,etation of +ig+ level ret$rns"
Risk*+&ee &(te o+ &et'&n: 5+e ret$rn on a ris.-less assetC often t+e
rate of ret$rn on 5reas$r! se$rities
De$rit! >nal!sis
5+e val$ation an% anal!sis of in%ivi%$al se$rities
5+enC a val$ation mo%el is a,,lie% to t+ese se$rities to estimate t+eir
,rie or val$e"
Portfolio )anagement
>fter t+e se$rities +ave 2een eval$ate%C a ,ortfolio s+o$l% 2e
onstr$te%"
Glo2al )ar.et
5+e im,ortane of a%%ing foreign se$rities is t+at investors an
a+ieve 2enefiial ris. re%$tion if some foreign mar.ets move
%ifferentl! t+an %o L"D" mar.ets"
5+e ris. re%$tion in a ,ortfolio is a res$lt of %iversifiation
3eg$lation F:: reg$lates omm$niations 2et-een ,$2li om,anies
an% investment ,rofessionals"
Bom,anies are not ,ro+i2ite% from %islosing materialC non,$2li
information to s,eifi t!,es of investment ,rofessionals $nless t+e
om,an! sim$ltaneo$sl! ,$2lil! %isloses t+e information"
Get$re 2 26-01-2014 18:07:00
- Investment >lternatives: 5+e ot+er o,tions t+at are availa2le rig+t no-"
- >lternative Investments: F$t$resC o,tionsC an% (e%ge f$n%s
(o- !o$ an invest
Direct investing: Ho$ are ,$r+asing t+e investments %iretl! !o$rself"
- (ave to o,en $, an ao$nt t+ro$g+ a 2ro.er 7e4" Dottra%e8
Indirect investing: (iring a mi%%le man to 2$! investment for !o$"
- E4am,le: /O3 is 2$!ing t+e m$t$al f$n%s for !o$"
- :eisions reF$ires !o$ to ,i. a om,an!C an% t+e m$t$al f$n%"
- Bonservative m$t$al f$n%s: Fille% -it+ 5-?ills
)ar.eta2le se$rities:
- Im,ersonal: 5+e 2$!er an% t+e seller never meet" No fae-to-fae
interationC it is %one on an e4+ange 2asis"
18 Money market securities:
- D+ort-term investments 7less t+an 1 !ear $ntil mat$rit!8" It is liF$i%
an% safe" E4am,les
- 5-2ill: /+en L"D" government nee%s mone! t+e! iss$e 5-2ills"
- Bommerial Pa,er: Bor,orations $se -+en t+e! +ave e4ess f$n%s"
Gi.e 5-2ills 2$t for or,orations 7P$r+ase% in large F$antities8
- B:Ms: D+ort-term 2an. investments 7P$r+ase% in large F$antities8
- 3e,os: 3e-,$r+ase agreement 7P$r+ase% in large F$antities8
28 Capital market securities:
- )at$res in greater t+an 1 !ear"
- Fi4e% inome: &t+er -or% is 2on%" E4am,les:
L"D 5reas$r! se$rities
Bor,orate ?on%s
)$nii,al
Government >gen!
- Dto.s: &t+er -or% is eF$it!" E4am,les:
Bommon sto.
Preferre% sto.
38 Derivative securities:
Non-mar.eta2le se$rities:
- Personal: 5+e 2$!er an% seller meets" Fae-to-fae investment
Investment >lternatives
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