Introduction to Securities Investment (Understanding Investment Decision Process) Individual’s Objective: Maximize utility (=degree of satisfaction) from consumption, subject to Income ; wealth, and market opportunities. In order to achieve the objective, people save a portion of (current) Income for future spending, and reverse Is also true. =; efficient saving. Where to save? (Security types in Chapter 3) 1. Real assets: 2. Financial assets: represent claims on future cash payoffs. I. O.
Us (=flexed income securities): bonds Certificate of ownership (=equity securities): common stocks, preferred stocks Contingent claims (=derivative securities): options, futures Marketable and non- marketable securities. Al. Objective of the Investment Fund Manager The primary objective of the investment fund manager is to maximize the market value of the fund. By providing more money to participants (or clients), the fund manager can help clients achieve their objectives (= spend more money and make them happier).
When do you need cash? (liquidity consideration) 3. Return requirements: after-tax return Maintain purchasing power (Inflation consideration) Fund growth, tax consideration 4. Risk tolerance: How much risks are you willing to take? Risk-averse investors: Investors would not hold risky assets unless sufficient risk premiums are paid. Expected risk-return trade-off: 5. Asset allocation: Risk-free assets (liquid assets) Risky assets: Fixed income securities: stable income streams Equity securities: capital gains/appreciation Life cycle theory of asset allocation 6.
Security selection Security analysis: fundamental analysis, technical analysis Market timing 7. Portfolio management: Efficient diversification 8. Portfolio performance evaluation and revision Monitoring the fund Measuring performance Changes in investor’s circumstances ‘V. Common Stock Investment Analysis and Strategy Analyzing Some Important Issues Involving Common Stocks Impact of the overall market on individual stocks (Market Risk) International perspective: additional risk consideration Required rate of return Risk and return relationship Building Stock Portfolios
Asset allocation Security selection Passive Investment Strategy Buy-and-hold strategy Index funds investments Active Investment Strategy Security selection: underpinned securities, superior earnings (; growth) Sector rotation Three Approaches for Analyzing and Selecting Stocks Fundamental analysis: Technical analysis Efficient market approaches Behavioral finance (Market psychology) Framework for Security Analysis Bottom-up approach: value versus growth Top-down approach: Economic/market analysis, industry analysis, company analysis