Introduction to Securities Investment
(Understanding Investment Decision Process)
Maximize utility (=degree of satisfaction) from consumption, subject to income & wealth, and market opportunities. In order to achieve the objective, people save a portion of (current) income for future spending, and reverse is also true. => efficient saving. Where to save? (Security types in Chapter 3)
1. Real assets:
2. Financial assets: represent claims on future cash payoffs. I.O.Us (=fixed income securities): bonds
Certificate of ownership (=equity securities): common stocks, preferred stocks Contingent claims (=derivative securities): options, futures Marketable and non-marketable securities.II. Objective of the Investment Fund Manager The primary objective of the investment fund manager is to maximize the market value of the fund. By providing more money to participants (or clients), the fund manager can help clients achieve their objectives (= spend more money and make them happier). Fund manager can separate individual investors’ risk/liquidity preferences and other preferences on social issues from investment decision-making. SRI (Socially Responsible Investments): Ex) MSCI KLD 400 Social Index (http://www.msci.com/resources/factsheets/index_fact_sheet/msci-kld-400-social-index.pdf ) III. Understanding the Investment Process (policy) (Ch. 2): 1. Setting up investment objectives: why do you save?
Unknown future events:
2. Investment horizon: Short-term vs. long-tem horizon
How long do you plan to invest (save)?
When do you need cash? (liquidity consideration)
3. Return requirements: after-tax return
Maintain purchasing power (inflation consideration)
Fund growth, tax consideration
4. Risk tolerance: How much risks are you willing to take?
Risk-averse investors: Investors would not hold risky assets unless sufficient risk premiums are paid. Expected risk-return trade-off:
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