Practice investment managerment pim3 ch01

Practical Investment Management
by

Robert A. Strong
University of Maine

PowerPoint Presentation
by

Yee-Tien Fu
National Cheng-Chi University
Taipei, Taiwan
South-Western / Thomson Learning © 2004


CHAPTER ONE

THE CONCEPT OF INVESTING

Practical Investment Management
Robert A. Strong


Outline
 Investing Defined
 Investment Alternatives
 Assets
 Securities
 Security Groupings

 Three Reasons for Investing

 Income
 Appreciation
 Excitement

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Outline
 The Academic Study of Investments
 Theoretical Research
 Empirical Research
 Professors vs. Practitioners

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Investing Defined

To consume, to save, or to invest
a dollar that is earned ?
Both saving and investing amount to
consumption shifting through time.
However, saving involves little, if any,
risk, while investing is a risky
endeavor.

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Investment Alternatives
Assets are things that people own.
Financial assets have a
corresponding liability, while real
assets do not.
Assets
Financial Assets
e.g. bond, stock

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Real Assets
e.g. land

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Investment Alternatives
A security is a legal document that
shows an ownership interest.
Although securities are historically
associated with financial assets, they are
also applicable to real assets.
Securitization is the process of converting an
asset or collection of assets into a more

marketable form.

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Investment Alternatives
There are three broad categories of securities.
Securities
Equity
Securities
e.g. common
stock

Fixed Income
Securities
e.g. bonds,
preferred stock

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Derivative
Assets
e.g. futures,
options

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Three Reasons for Investing
Why invest ???
People invest to …
 supplement their income
 earn capital gains
 Appreciation refers to an increase in the value of
an investment.

 experience the excitement of the investment
process
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The Academic Study of Investments
Theoretical research involves
building mathematical models and
proposing pricing relationships
rather than studying actual market
data.
E.g. arbitrage relationships, impact of stock
splits and cash dividends on investors
Theoretical models are frequently tested by
conducting empirical research.

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The Academic Study of Investments
Empirical research uses actual market data
rather than mathematical models.

An anomaly is an observed result that defies
explanation within the known theoretical
framework.

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The Academic Study of Investments

vs.
Professors

Practitioners

The investment community can learn much
from both rigorous academic research and
from the life experiences of people on the
front lines of the marketplace.

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Review
 Investing Defined
 Investment Alternatives
 Assets
 Securities
 Security Groupings

 Three Reasons for Investing
 Income
 Appreciation
 Excitement

Thomson Learning/ South-Western © 2004

1 - 13


Review
 The Academic Study of Investments
 Theoretical Research
 Empirical Research
 Professors vs. Practitioners

Thomson Learning/ South-Western © 2004

1 - 14