FUNDAMENTALS OF
INVESTMENTS
3rd Edition
Sharpe, Alexander, and
Bailey
Power Point Presentations
prepared By
Joseph F. Greco, Ph.D.
California State University, Fullerton
1
Chapter One
Introduction
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The Investment
Environment
• What are securities?
– Definition: a legal representation of the right to
received prospective future benefits under
stated conditions.
3
The Investment
Environment
– Calculating the RATE OF RETURN :
R = (p1 - p0)/ p0
where
R = the rate of return
P0 = the beginning price
P1 = the ending price
4
The Investment
Environment
• Types of securities:
– Treasury bills
– Long term bonds
– Common stocks
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The Investment
Environment
• Risk, return, and diversification.
– The fundamental principle.
• Combining securities in a portfolio.
• Results in a lower level of risk.
• Than a simple average of the risks of each.
6
The Investment
Environment
• Security markets:
– Function: meeting place for buyers and
sellers
– Types of markets based on issuer:
• Primary
• Secondary
7
The Investment Process
• Five steps:
– Set investment policy
– Perform security
analysis
– Construct a portfolio
– Revise the portfolio
– Evaluate performance
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STEP 1: Investment Policy
– Identify investor’s unique objective
– Determine amount of investable wealth
– State objectives in terms of risk and return
– Identify potential investment categories
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Step 2: Security Analysis
– Using potential investment categories,
find mispriced securities
– Using fundamental analysis
• Intrinsic value should equal discounted present
value
– Compare current market price to true market
value
– Identify undervalued securities
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Step 3: Construct a
Portfolio
• Identify specific assets and proportion of
wealth in which to invest
• Address issues of
– Selectivity
– Timing
– Diversification
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Step 4: Portfolio Revision
• Periodically repeat step 3
• Revise if necessary
– Increase/decrease existing securities
– Delete some securities
– Add new securities
12
Step 5: Portfolio
Performance Evaluation
• Involves periodic determination of portfolio
performance with respect to risk and return
• Requires appropriate measures of risk and
return
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