Topic 1: Introduction
FINA 3702C
Investment Analysis and Portfolio Management
Arkodipta Sarkar
Introduction
• My Research
– Empirical Corporate Finance
– Investment Decisions
• More About Myself
–
–
–
–
–
–
Born in India
BSc in Economics (Presidency College Kolkata)
MA in Economics (Delhi School of Economics)
MRES, PhD in Finance (London Business School)
Assistant Professor at HKUST 2020-22
Joined NUS in 2022
Importance of Learning Investment
Sports Illustrated, 2009
“78% of former NFL players either gone bankrupt or are under financial stress
within two years of retirement”
“60% of NBA players are broke five years after they retire”
Players
Latrell Sprewell
Kenny Anderson
Derrick Coleman
Antione Walker
Allen Iverson
Estimated Career Earnings (USD)
50 million
60 million
87 million
110 million
154 million
Filed Bankruptcy
2007
2005
2010
2010
2012
Course Details
• Office Hours
– By appointment (asarkar@nus.edu.sg)
• Textbook
– Bodie, Zvi, Alex Kane and Alan Marcus, 2021, Investments (12th Edition), McGraw Hill, ISBN 978-1-26059024-1
• Course website:
– https://canvas.nus.edu.sg
Grading Structure
• 4 Problem Sets given through out the course (20%, 5% each)
– One Week deadline from the time that it is given
• 1 Midterm Test (25%)
– Week 7, date to be confirmed
• 1 Final Exam (40%)
– Exam week on May 5, 2023 at 2:30pm
• Class Participation (10%)
– Active participation implies active learning
• Investment Ethics (5%)
– There will be online materials for study of Ethics and a quiz on the materials. This is in compliance to
NUS being a CFA affiliated institution
Syllabus
Week
Topics
1
Topic 1: Introduction (BKM Chapter 1 to 5)
2
Topic 2: Portfolio Theory (BKM Chapter 6 to 7)
3
Topic 3: Asset Pricing Models (BKM Chapter 8, 9 & 10)
4
Topic 3: Asset Pricing Models (cont.)
5
Topic 4: Efficient Market Hypothesis and Behavioural Finance (BKM Chapter 11)
6
Revision
Deliverable (end of week)
Problem Set 1
Problem Set 2
Recess Week
7
No Lesson: Mid Term Test
8
Topic 5: Portfolio Management (BKM Chapter 24)
9
Topic 6: Bond Analysis (BKM Chapter 14, 15 & 16)
10
Topic 6: Bond Analysis (Cont.)
11
Topic 7: Security Analysis (BKM Chapter 17, 18 & 12.2)
12
Topic 8: Future and Options (BKM Chapter 20, 21, 22, & 23)
13
Revision
Problem Set 3
Problem Set 4
Midterm/Final Exams
• Midterm Test:
– Topics 1-4
• Final Exam
– All topics. Special focus on topics 5-8
• Will be comprised of both multiple choice questions and open questions
Let’s Get Started
Learning Outcomes:
• What is an investment?
• What can we invest in?
• Where can we invest?
• How can we invest?
Learning Outcomes:
• What is an investment?
• What can we invest in?
• Where can we invest?
• How can we invest?
What is an investment?
• An investment is the current commitment of money or other resources
in the expectation of reaping future benefits
• Everyone is making investments at some points of his life.
– Earn money and spend money
– Examples: bank accounts; education; housing; healthcare; insurance; retirement
etc.
• The knowledge, understanding and practices of investment concepts
and principles can lead to drastic different lifestyles, household wealth
and quality of life.
What is an investment?
• What are the key elements in an investment?
– Resources: Capital
– Goals: Return
– Willingness: take risk
• Return & Risk
–
–
–
–
Expected return
Risk
Return distribution
Return-risk relation (Sharpe Ratio)
Expected return
• There a whole range of possible returns in the future given the risk in the
financial market. Expected return is usually a mean (or average) of a possible
distribution of all possible return realization
• Expected return is what we care about for an investment. It contains the best
estimation of what will happen in the future time horizon.
– We use E(r) or E(R) to represent the expected return, where “r” represents the
simple return and “R” represents the gross return (1+r).
• Realized (actual) return can be very different from expected return, and the
difference is due to risk.
Example 1: Two Lotteries
• Suppose you face the following two lotteries. Which will you prefer?
– Lottery 1: Get $100 for sure
– Lottery 2: Get $200 or $0 with equal probability
• Note the expected payoff of Lottery 2 is $100
Example 1: Two Lotteries
• Suppose you face the following two lotteries. Which will you prefer?
– Lottery 1: Get $100 for sure
– Lottery 2: Get $200 or $0 with equal probability
• Note the expected payoff of Lottery 2 is $100
• If you prefer Lottery 1, then you are risk averse
– You will value Lottery 2 less than $100, say $80
– The difference $20 is the compensation for you to hold the uncertain outcomes.
Example 2: St. Petersburg Paradox
• Consider a simple experiment.
– I will toss a coin repeatedly until tails appear
– I will put $1 in the payoff pot if the first toss is heads and then double the pot every
time heads appear
– When I toss a tail, you walk away with whatever is in the pot
– So if I toss four straight heads and then a tail, I'll pay you: 1 ∗ 2 ∗ 2 ∗ 2 = 23 = 8
– If I toss n straight heads and then a tail, I'll pay you $2𝑛−1
• How much will you be willing to pay to play such a game?
Example 2: St. Petersburg Paradox
• Consider a simple experiment.
– I will toss a coin repeatedly until tails appear
– I will put $1 in the payoff pot if the first toss is heads and then double the pot every
time heads appear
– When I toss a tail, you walk away with whatever is in the pot
– So if I toss four straight heads and then a tail, I'll pay you: 1 ∗ 2 ∗ 2 ∗ 2 = 23 = 8
– If I toss n straight heads and then a tail, I'll pay you $2𝑛−1
• How much will you be willing to pay to play such a game?
• Your expected payoff is
Example 2: St. Petersburg Paradox
• The gamble has an expected value of infinity but most of us would pay only a few
dollars to play this game.
• One resolution of the paradox: human's decision criterion depends on expected utility
rather than expected price
– and utility function takes into account agents' risk aversion
• The value of an item must not be based upon its price, but rather on the utility it yields.
The price of the item is dependent only on the thing itself and is equal for everyone; the
utility, however, is dependent on the particular circumstances of the person making the
estimate.
--Daniel Bernoulli
The logic extends to financial markets...
• Investors dislike risk: they are risk averse
– For a given level of return they would prefer the asset with the lower risk
– If they take on more risk by holding one asset, they should require more return
• So return is only half the story in finance: we also need to take into account risk
– Discount rates should therefore reflect not only the time value of money, but also
the riskiness of the underlying security
Risk and Return
Risk and Return
• In general, high risk is associated with high returns
– Small stocks are riskier, but they have high return
– Larger stocks are less risky than small stocks, more risky than bonds and T-Bills
– Treasury bills are virtually risk-free, but they have low returns
• Next, how should we measure returns and risk?
Measuring Returns
• Returns can either be ex post, meaning returns were already realized, or ex ante, which
means they are expected.
• Let's first look at ex post returns.
• Holding period return if you bought a stock at time t-1 and sold it at a time t is:
𝑅𝑡 =
• Return during year 1 is 𝑅1 =
• Return during year 2 is 𝑅2 =
𝑃𝑡 +𝐷𝑡 −𝑃𝑡−1
𝑃𝑡−1
110+5−100
100
112+6−110
110
=
𝑃𝑡 +𝐷𝑡
𝑃𝑡−1
= 15%
= 7.27%
−1
Measuring Realized Returns
• Holding period return realized over two years is 1.15 *1.0727 - 1 = 23.36%
• Holding period return per year is 1.15 ∗ 1.0727
• In general, holding period return per period is
1
2
− 1 = 11.07%
• Known as the geometric mean return (equiv. to the effective rate)
• Note: When holding period is beyond the date of the first dividend, to compute the
return we must specify how we invest dividends in the interim.
– Geometric mean assumes that all dividends are immediately reinvested and used to
purchase additional shares of the same stock or security.
Measuring Realized Returns
• By contrast, the arithmetic or simple mean is
• The average annual return in the previous example is
Geometric mean vs. Arithmetic mean
• An example
– Suppose no dividends, P0 = $100; P1 = $200; P2 = $100.
– Then R1 = 100%, R2 = -50%
1
2
– Geometric mean (HPR) is 2 ∗ 0.50 − 1 = 0%
– Simple mean is (1 – 0.50)/2 = 25% ⇒ Can be misleading
• The geometric mean represents really your return on investment.
– Most often used for comparison purposes.
• Arithmetic mean is used when trying to estimate an investment's expected return over
a future horizon based on its past performance.
– Assuming each observation is equally likely
Measuring Expected (Ex Ante) Returns
• Ex post (past) returns are interesting to study to understand what has happened and why it has
happened
• But what investors and investment professionals really care to know are ex ante returns, or estimates of
the future returns
Measuring Expected (Ex Ante) Returns
• Ex post (past) returns are interesting to study to understand what has happened and why it has
happened
• But what investors and investment professionals really care to know are ex ante returns, or estimates of
the future returns
• The ex ante, or expected return can be computed by estimating the probability 𝑃𝑠 of each state s
happening and multiplying it by the return in that state 𝑅𝑠
Measuring Expected (Ex Ante) Returns
• Ex post (past) returns are interesting to study to understand what has happened and why it has
happened
• But what investors and investment professionals really care to know are ex ante returns, or estimates of
the future returns
• The ex ante, or expected return can be computed by estimating the probability 𝑃𝑠 of each state s
happening and multiplying it by the return in that state 𝑅𝑠
Measuring Expected (Ex Ante) Returns
• Ex post (past) returns are interesting to study to understand what has happened and why it has
happened
• But what investors and investment professionals really care to know are ex ante returns, or estimates of
the future returns
• The ex ante, or expected return can be computed by estimating the probability 𝑃𝑠 of each state s
happening and multiplying it by the return in that state 𝑅𝑠
Measuring Expected (Ex Ante) Returns
• Ex post (past) returns are interesting to study to understand what has happened and why it has
happened
• But what investors and investment professionals really care to know are ex ante returns, or estimates of
the future returns
• The ex ante, or expected return can be computed by estimating the probability 𝑃𝑠 of each state s
happening and multiplying it by the return in that state 𝑅𝑠
Measuring Return: Exercise
• Consider a stock with the following three annual returns in year 1, 2 and 3: 10%, 8%,
and -4%.
• Suppose your friend plans to invest in this stock for the next year, and assume
probabilities of having 10%, 8%, and -4% returns in the coming year are equal.
• Questions:
– 1 What is the realized returns for three-year holding period?
– 2 What is the realized annual return?
– 3 What should you use to compute the expected return? What is it?
• Answer:
Measuring Return: Exercise
• Consider a stock with the following three annual returns in year 1, 2 and 3: 10%, 8%,
and -4%.
• Suppose your friend plans to invest in this stock for the next year, and assume
probabilities of having 10%, 8%, and -4% returns in the coming year are equal.
• Questions:
– 1 What is the realized returns for three-year holding period?
– 2 What is the realized annual return?
– 3 What should you use to compute the expected return? What is it?
• Answer:
– Holding period return = 1 + 10% 1 + 8% 1 − 4% − 1 = 14.05%
– Realized annual return =
– Arithmetic return =
1 + 10% 1 + 8% 1 − 4%
10%+8%−4%
3
= 4.67%
1
3
− 1 = 4.48%
Measuring Risk
• There is no universally agreed-upon definition of risk
• The most commonly used measure is the variance
• The standard deviation (or volatility) is the squared root of the variance:
• It's handy because it has the same scale as average returns.
• Standard deviation leaves something to be desired as a measure of risk though as both
unusually large gains will elevate the measure as much as unusually large losses will
Measuring Risk Example
• We already computed E(RA) = 0.05 and E(RB) = 0.026
• We can now use either formula to compute variance and standard deviation
Measuring Risk Example
• We already computed E(RA) = 0.05 and E(RB) = 0.026
• We can now use either formula to compute variance and standard deviation
Measuring Risk Example
• We already computed E(RA) = 0.05 and E(RB) = 0.026
• We can now use either formula to compute variance and standard deviation
Why Variance (Volatility) to Measure Risk?
• Most finance models assume that the returns we observe in the real world are random variables coming
from a normal distribution
• Normal distributions are probability distributions that are fully characterized by their mean and variance
– If we can accurately compute the mean and the variance of returns for a given stock, we can compute
the probability of any return for this stock
• Example: Same mean, larger standard deviation for blue stock
Using Past Returns to Predict the Future
• Assuming the distribution of a stock's return is identical each year. Assuming the
distribution of the returns is independent of prior year's return.
– Historical Average Return (the average realized return) is an estimate of the
expected return in the future
• Use standard deviation to determine a reasonable range for the actual return:
– 95% 𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐼𝑛𝑡𝑒𝑟𝑣𝑎𝑙 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 ± 2 × 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛
Exercise
• Assume the distribution of returns of BM Stock is roughly normal. Given the mean and
the variance of BM stock's returns are 7%, and 129%, respectively, on average, once in
how many years should you expect to see that you will lose more than 15.72% from BM
Stock?
•
•
•
•
(A) 6.25 years
(B) 20 years
(C) 40 years
(D) 200 years
Exercise
• Assume the distribution of returns of BM Stock is roughly normal. Given the mean and
the variance of BM stock's returns are 7%, and 129%, respectively, on average, once in
how many years should you expect to see that you will lose more than 15.72% from BM
Stock?
•
•
•
•
(A) 6.25 years
(B) 20 years
(C) 40 years
(D) 200 years
Exercise Answer
• Calculate how many SD is -15:72% away from the mean 7%.#of SD =
7%− −15.72%
129%
=2
• Recall 95% confidence interval is 2SD away from the mean. So the probability of observing
return lower than -15.72% is 5%/2 = 2.5%.
• Therefore, on average, once in 1/(2.5%) = 40 years. we expect a return lower than -15.72%.
Learning Outcomes:
• What is an investment?
• What can we invest in?
• Where can we invest?
• How can we invest?
Learning Outcomes:
• What can we invest in?
– Real assets and financial assets
– Direct and indirect investment
– Short-term and long-term investment
– High-risk and low-risk investment
Real assets and financial assets
• What are real assets?
– Examples: Land, buildings, machines, knowledge, patents, human capital etc.
– Determine the net income of the economy
– Determine the production capacity
• What are financial assets?
– Examples: stocks, bonds, derivatives etc.
– Financial assets are claims on the income generated by real assets (or from the
government)
Direct and indirect investment
• Direct investment:
– buy or sell securities/properties
• Indirect investment:
– buy or sell a collection of securities/properties managed by a professional investor
• Less direct investment and more indirect investment over the time
Indirect investment via investment companies
• Pool funds of individual investors and invest in a wide range of securities or
other assets.
• Provide services such as administration & record keeping; diversification &
divisibility; professional management; reduced transaction cost
• Examples: unit trust; mutual funds; REITs; Hedge Funds; Islamic Investment
Funds; Sovereign Wealth Funds
• Funds are sold via direct marketing or sales forces distributed or use financial
supermarkets
• What are the costs: Operating expenses; Front-end load; Back-end load; 12 b-1
charge (in the U.S.) (read the prospectus)
Return of Mutual Fund investment
• Initial net asset value (NAV) = $20 (per share)
𝑁𝐴𝑉 =
–
–
–
–
𝑀𝑉 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
Income distributions of $.15
Capital gain distributions of $.05
Ending NAV = $20.10
What is the rate of return?
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛
𝑁𝐴𝑉1 − 𝑁𝐴𝑉0 + 𝐼𝑛𝑐𝑜𝑚𝑒 & 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑔𝑎𝑖𝑛 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠
=
𝑁𝐴𝑉0
=(20.10 – 20 + 0.15 + 0.05)/20 = 1.5%
Example: Mutual Fund Investment
• You purchased shares of a mutual fund at a price of $20 per share at the beginning of
the year and paid a front-end load of 5.75%. If the securities in which the fund invested
increased in value by 11% during the year, and the fund's expense ratio was 1.25%. If
you sold the fund at the end of the year, what would be your return?
Example: Mutual Fund Investment
• You purchased shares of a mutual fund at a price of $20 per share at the beginning of
the year and paid a front-end load of 5.75%. If the securities in which the fund invested
increased in value by 11% during the year, and the fund's expense ratio was 1.25%. If
you sold the fund at the end of the year, what would be your return?
Return:
= {[$20 * (1-0.0575) * (1.11 − .0125)] -$20}/$20
= 3.44%
Short-term and long-term investment
• Short term investment:
– Money Market Instruments with maturity <= 1 year
– Examples: deposit accounts, T-bills, Certificate of deposits (CDs), commercial papers (CPs),
Bankers’ acceptances (BAs), Money market mutual funds etc.
• Long-term investment:
– Capital Market Instruments with maturity > 1 year
– Examples: bond; equity; derivatives
Long-term Investment
• Types of Bond Instruments
– Examples: Treasury bonds; corporate bonds; Municipal bonds; International bonds; Federal
Agency Debt; Asset-Backed Securities; Mortgage-backed securities; TIPS
• Types of Equity Instruments
– Examples:Common stocks; Preferred stocks; American/Global Depository Receipts; Stock
indices: S&P500; Straits Times Index
• Types of Derivatives
– Examples: options (calls and puts); forward & futures
Risk of Equity and Bond Returns Around the
World (1900-2000)
Summary of Stylized Facts
• Asset classes that provide higher return are more risky
– Return: Stocks > Bonds
– Risk: Stocks > Bonds
• These rankings hold in global markets as well.
• Tradeoff between risk and return:
– Does an expected return provide adequate compensation for the
additional risk?
Learning Outcomes:
• What is an investment?
• What can we invest in?
• Where can we invest?
• How can we invest?
Learning Outcomes:
• Where can we invest?
– Types of financial markets
– Functions of financial markets
– Participants
– Regulatory Framework
Types of financial markets
• Primary Market
– Firms issue new securities through underwriters to the public
– Example: IPO/SEO/Private Placement
• Secondary Market
– Investors trade previously issued securities among themselves
– Firms do not receive proceeds
Functions of financial markets:
• Provide information
• Timing of consumption
• Allocation of risk
• Separation of ownership and management
• Corporate governance
• Corporate ethics
Regulatory Framework
• Major regulations:
– Securities Act of 1933
– Securities Act of 1934
– Securities Investor Protection Act of 1970
• Self-Regulation
– Financial Industry Regulatory Authority (FIRA)
– CFA Institute standards of professional conduct
• Sarbanes-Oxley Act
– E.g., Accounting/audit/financial reports/board of directors
Learning Outcomes:
• What is an investment?
• What can we invest in?
• Where can we invest?
• How can we invest?
Learning Outcomes:
• How can we invest?
– Type of markets for trading
– Types of orders
– Trading costs
– Trade on margins
– Short sale
Types of markets for trading
• Direct search
• Brokered markets
• Dealer markets
• Auction markets
• Specialist markets
• Electronic markets
Types of Orders
• Market Order: Executed Immediately
• Limit Order: Pre-contingent order
Trading Costs
• Brokerage Commission
– Fees paid to Broker
– Explicit or implicit cost? explicit cost
• Bid-ask Spread
– A profit for dealer for making the market.
– An investor gets bid and pays ask
– Explicit or implicit cost? Implicit Cost
Trade on Margins
• Investor borrow part of the purchase using a loan from a broker.
• Margins refers to the contribution from the investor.
• Initial margin refers to the starting contribution
– In US., 50% is the initial margin requirement for equities.
• Maintenance margin refers to the minimum amount you need to keep in the
margin account. It is to guard the possibility that owners’ equity becomes
negative (when price falls too much).
• A margin call occurs when the value of the investor’s margin account drops
and fails to meet the account's maintenance margin requirement. While faced
with margin calls, investors are required to top up to the initial margin (for
example).
Trade on Margins
Initial Condition:
Share price
$100
60%
Initial Margin
40%
Maintenance Margin
100
Shares Purchased
Initial Position
Stock $10,000 Borrowed
Equity
$4,000
$6,000
Stock price falls to $70 per share, what is the margin now?
Trade on Margins
Stock price falls to $70 per share, what is the margin now?
New Position
Stock $7,000 Borrowed
Equity
$4,000
$3,000
Margin = $3000/$7000 = 43%
Trade on Margins
How far can the stock price fall before a margin call?
Trade on Margins
How far can the stock price fall before a margin call?
Recall maintenance margin = 40%
Equity = 100P - $4000
Percentage margin = (100P - $4,000) / 100P
(100P - $4,000) / 100P = 0.40
Solve to find:
P=$66.67
Trade on Margins
If the price falls to $65, how much will the investor need to top up in the margin
account?
Trade on Margins
If the price falls to $65, how much will the investor need to top up in the margin
account?
Total value of stock = $65×100 = $6,500
Borrowed $4,000
Equity = 100×65 - $4000 = $2,500
Percentage margin = $2,500 / (100×65) = 38%
This is below the maintenance margin of 40%.
Need to top up to: 60% ×100×65 = $3,900
Top up amount = $3,900 - $2,500 = $ 1,400
Why do investors buy securities on margin?
• They do so when they wish to invest an amount greater than their
own money allows. Thus, they can achieve greater upside
potential, but they also expose themselves to greater downside
risk.
• Investor’s rate of return =
𝐸𝑛𝑑 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 −𝑅𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑜𝑓 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑎𝑛𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡+𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
Example:
𝐸𝑞𝑢𝑖𝑡𝑦 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑
Initial Condition:
• Share price $100
Change in
stock price
• Initial margin 60%
• Maintenance margin 40%
• Shares purchased 1000
• Interest rate 9% p.a.
• No dividends
+$30
0
-$30
−1
End-ofyear value
of shares
Repayment
of principal
and
interest
Investor’s
rate of
return
$130,000
$43,600
44%
100,000
43,600
-6%
70,000
43,600
-56%
Short Sale
• Purpose: profit from a fall in a security price
• Mechanism:
– Borrow stock from a broker
– Sell the stock and deposit proceeds and initial margin in an account
– Close out by buying back the stock and return it to the one from who you borrow.
Short Sale and Margins
• Initial Condition: Short Sale DotCom Stock at $100
Initial Price
$100
Initial Margin
50%
Maintenance Margin
30%
DotCom
1,000 shares
Sale Proceeds
$100,000
Stock Owed
1,000 shares
Assets
$100,000 (sale proceeds)
Liabilities
$100,000 (shares owed: 100×1,000)
Equity
$50,000 (initial margin, in cash)
$50,000
Short Sale and Margins
• New Condition: DotCom Price falls to $70 now
Assets
Liabilities
$100,000 (sale proceeds)
$70,000 (shares owed: 70×1,000)
Equity
$50,000 (initial margin, in
cash)
$80,000
• Profit = ending equity – beginning equity
= decline in share price * number of shares sold short
= $80,000 - $50,000 = $30,000
Short Sale and Margins
At what price would the investor receive a margin call?
Given that maintenance margin = 30%
Shares owed = 1,000P
Equity = 150,000 - 1000P
Percentage margin = (150,000 - 1000P) / 1000P
Hence, we get:
(150,000 – 1000P) / 1000P = 0.30
Solve to find:
P=150,000/130,000 = $115.38
What next: Asset Allocation
The most fundamental decision of investing is the allocation of your assets:
How much should you own in stocks and bonds? How much should you own in
cash reserves?
“That decision [has been shown to account] for an astonishing 94% of the
differences in total returns achieved by institutionally managed pension
funds….There is no reason to believe that the same relationship does not hold
true for individual investors.”
John Bogle (founder, Vanguard)
Summary
•
•
•
•
What is an investment?
What can we invest in?
Where can we invest?
How can we invest? (to be continued...)
• Readings: BKMJ Chapter 1, 2, 3, 4, 5.