7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 1/16

Introduction to Investment

 Chapter 1

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 2/16

Why Do Individuals Invest ?

By saving money (instead of spending it), individuals

forego consumption today in return for a larger

consumption tomorrow.

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 3/16

How Do We easure !he "ate #f

"eturn #n $n Investment ?

!he real rate of interest  is the e%change rate &etween

future consumption (future dollars) and present

consumption (current dollars). ar'et forces

determine this rate.

Today

Tomorrow

$100

$104If you are willing to exchange acertain payment of $100 todayfor a certain payment of $104

tomorrow, then the pure or realrate of interest is 4%

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 4/16

If the purchasing power of the future payment will

 &e diminished in value due to inflation, an investor

will demand an inflation premium to compensatethem for the e%pected loss of purchasing power.

If the future payment from the investment is not

certain, an investor will demand a risk premium to

compensate for the investment ris'.

How Do We easure !he "ate #f

"eturn #n $n Investment ?

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 5/16

Defining an Investment

$ny investment involves a current commitment offunds for some period of time in order to derivefuture payments that will compensate for

the time the funds are committed (the real rate of return)

the e%pected rate of inflation (inflation premium)

uncertainty of future flow of funds (risk premium)

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 6/16

Investment #&ectives

*hort !erm high priority o&ectives

+ong !erm high priority o&ectives

+ow priority o&ectives oney ma'ing o&ectives

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 7/16

%pectation from Investment

+ifestyle

-inancial *ecurity

"eturn alue for oney

/eace of ind

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 8/16

lements of Investment

"eturn

"is' 

!ime +i0uidity

!a% *avings

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 9/16

Investment $lternatives

*hares

De&entures and Bonds

/u&lic Deposits Ban' Deposits

/ost #ffice *avings

/u&lic /rovident -und (//-) oney ar'et Instrument

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 10/16

1ontd.

utual -und *chemes

+ife Insurance *chemes

"eal states 2old3*ilver 

Derivative Instruments

1ommodity ar'et (commodities)

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 11/16

!he Investment /rocess

-ive steps

*et investment policy

/erform security analysis 1onstruct a portfolio

"evise the portfolio

valuate performance

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 12/16

*!/ 4 Investment /olicy

Identify investor5s uni0ue o&ective

Determine amount of investa&le wealth

*tate o&ectives in terms of ris' and return

Identify potential investment categories

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 13/16

*tep 6 *ecurity $nalysis

7sing potential investment categories,

  find mispriced securities

7sing fundamental analysis• Intrinsic value should e0ual discounted present value

1ompare current mar'et price to true mar'et value

Identify undervalued securities

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 14/16

*tep 8 1onstruct a /ortfolio

Identify specific assets and proportion of wealth in

which to invest

$ddress issues of  *electivity

!iming

Diversification

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 15/16

*tep 9 /ortfolio "evision

/eriodically repeat step 8

"evise if necessary

Increase:decrease e%isting securities

Delete some securities

$dd new securities

7/23/2019 Chapter 1 IAPM

http://slidepdf.com/reader/full/chapter-1-iapm 16/16

*tep ; /ortfolio /erformance

valuation Involves periodic determination of portfolio

 performance with respect to ris' and return

"e0uires appropriate measures of ris' and return