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Topic I
Investments
：Background and Issues
1
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.
2
What is an investment ?
How about baseball
cards or Beanie Babies?
Are they an investment?
Possibly, but compensation is
highly uncertain, and some of the
value of ownership may be
“sentimental” rather than
financial in nature.
3
What is an investment ?
 pure time value of money→
 expected rate of inflation→
investment risk (risk premium) →
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Return and Risk
5
Measuring Returns
Dollar Returns VT=Income+ΔP
(1)HPR = V
V
T
0
(2)HPY = HPR – 1
Alternatives (i) V0=$250
(ii) V0=$100
VT=$350 in 2 yrs
VT=$112 in 6 mos
(3)Annual HPR =HPR1/N
(4)Annual HPY =HPR1/N – 1
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Measuring Historic Returns
─AM vs. GM
RA =
 HPY
n
RG = (πHPR)1/N -1
Year
Beginning Value
Ending Value
1
100.0
115.0
2
3
115.0
138.0
138.0
110.4
HPR
HPY
7
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 Returns
Income
Price Change
Reinvestment of income / price changes
p.29 Exhibit 2.4
9
Measuring Portfolio Returns
COMPUTATION OF HOLDING PERIOD YEILD FOR A PORTFOLIO
Investment
Number Beginning Beginning
of Shares Price
Market
Value
Ending
Price
Ending
Market
Value
HPR HPY Market Weighted
Weight HPY
A
100,000
$10
$1,000,000
$12
$1,200,000 1.20
20% 0.05
0.01
B
200,000
20
4,000,000
21
4,200,000 1.05
5
0.20
0.01
C
500,000
30
15,000,000
33
16,500,000 1.10
10
0.75
0.075
Total
$20,000,000
$21,900,000
0.095
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Measuring Returns ─ Uncertainty
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
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Measuring Risk (I)
變異數 (Variance)

2

p R j  E ( R j)
2
j
標準差 (Standard Deviation)
   p j[R j  E(R j)]
2
12
Measuring Risk (Π)
變異係數 (Coefficient of Variation)
CV =

E(R )
i
i
Markowitz平均數－變異數法則
or
R A  R B , 2A  2B
RA 
R B , 2A
 2B
AB
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Measuring Risk (III)
Range
Rmax – Rmin
Semivariance

2

 P [R
j
R j E ( R j )
j
 E ( R j )]
2
β係數 (Cov of returns w/ the mkt portfolio)
Cov( R j , Rm )
β=
 m2
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投資組合之期望報酬與風險
投資組合期望報酬
R p  Wi Ri
W  1
i
投資組合之變異數
當n = 2
 p2  WA2 A2  WB2 B2  2WA2 A2 Cov AB
 p2  WA2 A2  WB2 B2  2WA  B  AB A B
if
 AB  0
  p2  WA2 A2  WB2 B2
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Sources of Risk
Business risk
Financial risk
Liquidity risk
Exchange rate risk
Country risk
 Risk premium
Systematic Risk vs. Unsystematic Risk
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Conclusion:風險性資產必要報酬率
rf

e
Rf
RP
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Issues
18
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
20
THE ASSET ALLOCATION
DECISION
21
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.
22
Managing Risk
Since risk drives
expected return,
investing involves
managing risk rather
than managing return.
23
Risk Management Strategies
Risk Avoidance
Risk Anticipation
Risk Transfer
Risk Reduction
24
Individual Investor Life Cycle
p.134 Exhibit5.1
25
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
26
The Portfolio Management Process (Π)
p.136 Exhibit5.3
27
The Policy Statement
p.140 Exhibit5.4
28
The Policy Statement
p.141 Exhibit5.5
29
Basic Investment Philosophies
In 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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Summarizing the Basic Strategies
Asset Allocation Security
Selection
Active
Market timing
Stock picking
Passive
Maintain predetermined
allocation(s)
Try to track a
well-known
market index
31
Recent Trends
Globalization
Securitization
Financial Engineering
• bundling－hybrid security
• unbundling－IOs & POs
Computerizes trading
32
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)
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