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Introduction (chapter 1)

Introduction (chapter 1). 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.

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Introduction (chapter 1)

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  1. Introduction (chapter 1)

  2. 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.

  3. 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!

  4. Investment Industry Jobs • Working at • Commercial banks • Savings and credit unions • Securities firms • Investment banks • Companies • Credit rating agencies • Mutual funds • Life insurance companies • Securities exchanges • Jobs • Brokers • Traders • Portfolio managers • Financial planners • Investment bankers • Security analysts

  5. 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.

  6. 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 ER Bonds Risk-free Rate Risk

  7. Getting information - Newspapers

  8. Getting information - Magazines

  9. Getting information - Online

  10. The Investment Decision Process • Two-step process: • Security analysis and valuation • Necessary to understand security characteristics • Portfolio management • Selected securities viewed as a single unit • How and when should it be revised?

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