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Introduction(chapter 1)

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Objectives of the course and text

To understand the investments field as currently practiced Gain familiarity with the institutions and language of Wall

Street so as to facilitate the development of an effective personal investment strategy.

To help you make investment decisions that will enhance your economic welfare

To create realistic expectations about the outcome of investment decisions

Acquire a framework for understanding the returns on all financial assets, including stocks, bonds and financial derivatives.

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Buy High, Sell Low?! It is obvious that investors should buy low and sell

high in order to build wealth over time. - So why do investors frequently buy high and sell low?

The investment process involves analytical analysis of investment alternatives that are filtered through a decision process that is fraught with psychological biases. - To be a successful investor, you should be able to use the

analytical tools and control your emotions and psychological biases!

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Investment Industry Jobs

Jobs- Brokers- Traders- Portfolio managers- Financial planners- Investment bankers- Security analysts

Working at- Commercial banks- Savings and credit unions- Securities firms- Investment banks- Companies- Credit rating agencies- Mutual funds- Life insurance companies- Securities exchanges

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Key Investment Concepts A portfolio

- Diversified (hopefully!) collection of stocks, bonds and other assets.

- Individual investments are often evaluated on how they change the characteristics of the portfolio.

Risk- Chance of economic loss. - Sometimes measured as a variation in

return. Expected Return

- Anticipated gain of a specific period of time.

- Often evaluated as compensation for taking certain types of risks.

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The Tradeoff Between Expected Return and Risk

Investors manage risk at a cost - lower expected returns (ER)

Any level of expected return and risk can be attained

Risk

ER

Risk-free Rate

Bonds

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Getting information - Newspapers

Barron’s http://www.barrons.com/ Biting market commentary once a week, portfolio analysis and databank.

Investor’s Business Daily http://www.investors.com/default.asp Founder William O’Neal dispenses stock picking, charting, and momentum strategies. Big on investor education.

The Wall Street Journal http://online.wsj.com/home/us The daily paper when it comes to financial news and information. Print subscribers get interactive access at a bargain price.

USA Today http://www.usatoday.com/money/front.htm

Don’t underestimate “McPaper’s” Money Section when it comes to business, economic, and financial news. It’s terrific!

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Getting information - MagazinesBusiness Week http://businessweek.com/index.html Timely business news and analysis,

useful business school, career and small business information.

The Economist http://www.economist.com/ Offers analysis and opinion on the business and political events of the week.

Forbes http://forbes.com/ Terrific commentary on economics and financial markets from an all-star stable of regular columnists.

Fortune http://www.fortune.com/fortune Famous for Fortune 500 company list. Interesting advice on career development.

Kiplinger's Personal Finance http://www.kiplinger.com Provides practical guidance on saving, investing, planning for retirement, and major purchases.

Money http://money.cnn.com/ Interesting market commentary, company and mutual fund analysis aimed at novice investors.

Smart Money http://www.smartmoney.com/ Serves the need for personal finance information for affluent, sophisticated, professional, and managerial Americans.

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Getting information - OnlineCBS MarketWatch http://cbs.marketwatch.com Focused on financial news and

information. Individual investors can find news, commentary, advice, and stock price information.

The Motley Fool www.fool.com An online forum designed to "educate, amuse and enrich investors." A constant stream of witty investment advice on active message boards.

MSN Money http://moneycentral.msn.com/home.asp Investing highlights for customized portfolios, market reports, mutual fund directory, retirement and personal finance.

TheStreet.com www.thestreet.com A full menu of stock analysis, market commentary, and biting satire.

U.S. Securities and Exchange Commission

http://www.sec.gov/ This is the place to find free access to official SEC filings by individual companies, obrain information about individual brokers, or file a complaint about shady business practices

Yahoo! Finance http://finance.yahoo.com/ A terrific web site with U.S. markets, world markets, quotes, financial news, and data.

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The Investment Decision Process

Two-step process:- Security analysis and valuation

Necessary to understand security characteristics

- Portfolio managementSelected securities viewed as a single unitHow and when should it be revised?