1 Topic I ： Background and Issues Investments. 2 What is an investment ? Is hiding money in a mattress or keeping it in a piggy bank an investment ? No!

1

Topic I

： Background and Issues

Investments

2

What is an investment ?

Is hiding money in a

mattress or keeping it in a

piggy bank an investment ?

No! The “safe-keeping” of

money does not involve

any expected compensation.

3

What is an investment ?

How about baseball

Possibly, but compensation ishighly uncertain, and some of the value of ownership may be “sentimental” rather than financial in nature.

cards or Beanie Babies? Are they an investment?

4

pure time value of money→

  expected rate of inflation→

investment risk (risk premium) →

What is an investment ?

5

Return and Risk

6

Measuring Returns

Dollar Returns VT=Income+ΔP

(1)HPR =VV T

0

(2)HPY = HPR – 1

Alternatives (i) V0=$250 VT=$350 in 2 yrs

(ii) V0=$100 VT=$112 in 6 mos

(3)Annual HPR =HPR1/N

(4)Annual HPY =HPR1/N – 1

7

Measuring Historic Returns─AM vs. GM

RA = n

HPY

RG = (πHPR)1/N -1

3 138.0 110.4

Year Beginning Value Ending Value HPR HPY

1 100.0 115.0

2 115.0 138.0

8

Year Beginning Value Ending Value HPR HPY

1 50 100 2.00 1.00

2 100 50 0.50 -0.50

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Sources of ReturnsIncomePrice ChangeReinvestment of income / price changes

p.29 Exhibit 2.4

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Measuring Portfolio Returns

0.095$21,900,000 $20,000,000 Total

0.0750.75101.1016,500,000 3315,000,000 30500,000 C

0.010.2051.054,200,000 214,000,000 20200,000 B

0.01 0.05 20% 1.20 $1,200,000 $12 $1,000,000 $10 100,000 A

Weighted HPY

Market Weight

HPY HPR Ending Market Value

Ending Price

Beginning Market Value

Beginning Price

Number of Shares

Investment

COMPUTATION OF HOLDING PERIOD YEILD FOR A PORTFOLIO

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Economic Conditions Probability Rate of Return

Strong economy, no inflation 0.15 0.20

Weak economy, above － average inflation 0.15 -0.20

No major change in economy 0.70 0.10

Measuring Returns ─ Uncertainty

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Measuring Risk (I)

變異數 (Variance)

)(2

RERp jjj

2

標準差 (Standard Deviation)

)]([2

RERp jjj

13

Measuring Risk (Π)

變異係數 (Coefficient of Variation)

CV = )(Ri

i

E

2B

2ABA

2B

2ABA

,RR

,RR

BA or

Markowitz 平均數－變異數法則

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Measuring Risk (III)

Range

Rmax – Rmin

Semivariance

)(

2)]([

jj RERjjj RERP 2

β 係數 (Cov of returns w/ the mkt portfolio) β= 2

),(

m

mj RRCov

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投資組合之期望報酬與風險投資組合期望報酬

iip RWR

1 iW

投資組合之變異數 當 n = 2

BAABBABBAAp

ABAABBAAp

WWW

CovWWW

2

222222

2222222

if 0AB 22222BBAAp WW

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Sources of Risk Business risk

Financial risk

Liquidity risk

Exchange rate risk

Country risk

Systematic Risk vs. Unsystematic Risk

Risk premium

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Conclusion: 風險性資產必要報酬率

RP

fr

e fR

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Issues

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Issues That Investors Should Always Consider

There is a trade-off between risk and expected return

Developed financial markets are nearly efficient.

Focus on after-tax returns, net of expenses.

Diversify across asset types, industries, and even

countries.

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What types of investments can one make?

Real assets vs. Financial assets

Tangible assets vs. Claims on assets

Direct vs. Indirect financial investments

Individual securities vs. “pools” of assets

Derivatives

Futures, options

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THE ASSET ALLOCATION DECISION

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What is asset allocation?The process of deciding how to distribute

wealth among asset classes, sectors,

and countries for investment purposes.

Not an isolated choice, but

rather a component of the

portfolio management process.

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Managing Risk

Since risk drives

expected return,

investing involves

managing risk rather

than managing return.

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Risk Management StrategiesRisk Avoidance

Risk Anticipation

Risk Transfer

Risk Reduction

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Individual Investor Life Cycle

p.134 Exhibit5.1

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The Portfolio Management Process (I)

A four step process:

1. Construct a policy statement

2. Study current financial conditions and forecast future trends

3. Construct a portfolio

4. Monitor needs and conditions

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p.136 Exhibit5.3

The Portfolio Management Process (Π)

28

p.140 Exhibit5.4

The Policy Statement

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p.141 Exhibit5.5

The Policy Statement

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Basic Investment PhilosophiesIn forming an investment portfolio, several questions are paramount:

In what types of securities should I invest?

Within each security type, how do I select which assets to purchase?

Finally, how active should I manage my portfolio?

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Asset Allocation Security Selection

Active Market timing Stock picking

Passive Maintain pre-determined allocation(s)

Try to track a well-known market index

Summarizing the Basic Strategies

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Globalization

Securitization

Financial Engineering

• bundling － hybrid security • unbundling － IOs & POs

Computerizes trading

Recent Trends

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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.

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Jobs in Investments

Sales Registered representative of a brokerage firm Financial planners

Investment Analysis and Portfolio Management Brokerage firms, banks, money managers, mutual fund

managers, insurance companies

Professional Designations Chartered Financial Analyst (CFA) Certified Financial Planner (CFP)