1. 1 FUNDAMENTALS OF INVESTMENTS 3 rd Edition Sharpe, Alexander, and Bailey Power Point Presentations prepared By Joseph F. Greco, Ph.D. California State University, Fullerton

2. 2 Chapter One Introduction

3. 3 The Investment Environment What are securities? –Definition: a legal representation of the right to received prospective future benefits under stated conditions.

4. 4 The Investment Environment –Calculating the RATE OF RETURN : R = (p 1 - p 0 )/ p 0 where R = the rate of return P 0 =the beginning price P 1 = the ending price

5. 5 The Investment Environment Types of securities: –Treasury bills –Long term bonds –Common stocks

6. 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. 7 The Investment Environment Security markets: –Function: meeting place for buyers and sellers –Types of markets based on issuer: Primary Secondary

8. 8 The Investment Process Five steps: –Set investment policy –Perform security analysis –Construct a portfolio –Revise the portfolio –Evaluate performance

9. 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. 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. 11 Step 3: Construct a Portfolio Identify specific assets and proportion of wealth in which to invest Address issues of –Selectivity –Timing –Diversification

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

13. 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