The commitment of current funds in anticipation of receiving a larger future flow of funds


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The commitment of current funds in anticipation of receiving a larger future flow of funds.

  • The commitment of current funds in anticipation of receiving a larger future flow of funds.



Financial Asset

  • Financial Asset

  • Real Asset

    • Tangible asset that may be seen, felt, held, or collected




  • Risk and Safety of Principal

  • Current Income versus Capital Appreciation

  • Liquidity Considerations

  • Short-Term versus Long-Term Orientation

  • Tax Factors

  • Ease of Management

  • Retirement and Estate Planning Considerations



A BIG QUESTION:

  • A BIG QUESTION:

    • What factors can affect the value of your portfolio?


ANSWER:

  • ANSWER:

    • Anything that happens during the day, e.g.


Risk is the variability in the expected return

  • Risk is the variability in the expected return

    • High return with high risk
    • Low return with low risk
      • Conservative investors
        • Bank Saving accounts, CD’s, T-Bills, T-Notes, and T-Bonds


Current income

  • Current income

    • Objective: Income NOT growth
      • Bond Interests and stock dividends
      • High-yielding utilities, mature industries, …
  • Capital appreciation



  • Liquidity is measured by the ability to convert an investment quickly into cash at fair market value



Transaction costs

  • Transaction costs

  • Commissions

  • Difference between “bid” and “ask” price

  • Alternative investment opportunities with higher/unusual expected returns

    • Arbitrage
    • EXAMPLES – (with hindsight!) IPO’s of
      • Microsoft
      • Amazon.com
      • eBay


Short term (one year or less)

  • Short term (one year or less)

  • Intermediate term (between 1 to 10 years)

  • Long term (over 10 years)

  • Diversification of maturity dates



Traders

  • Traders

    • Short term market tactics
      • Investment horizon = days, hours, or seconds
    • Technical analysis
      • Market indicator series
      • Charting
      • Moving averages
      • Ceilings, floors, turning points,…


Investors

  • Investors

    • Buy and hold
    • Fundamental analysis
      • Growth rate in sales, market share,…
      • Earnings per share (EPS), profit margin,…
      • Financial Statement Analysis
        • Balance sheet
        • Income statement
        • Cash flow statement


High tax brackets

  • High tax brackets

    • Municipal bonds
      • Tax free
    • Real estate
      • Depreciation & interest write-offs
    • Tax credits
    • Tax shelters


“Professional investment managers” vs. “do-it-yourself approach”

  • “Professional investment managers” vs. “do-it-yourself approach”

    • Manager’s fee versus possible higher return
    • Opportunity costs
    • Time needed to analyze, choose, & manage
    • Psychic income
    • Leisure time


When is the best time to start a retirement plan?

  • When is the best time to start a retirement plan?

  • As early as possible

    • TAX BENEFIT
    • COMPOUNDING EFFECT
  • Other factors:

    • Personal or family obligations
    • Legal issues


  • Please click on the Excel icon



General increase in prices for goods and services

  • General increase in prices for goods and services

  • Purchasing power falls

  • Example: If inflation = 2%, then a $1 pack of gum will cost $1.02 in a year.











Uncertainty associated with outcomes from an investment

  • Uncertainty associated with outcomes from an investment

  • The higher the risk, the higher the expected return (compensation)

  • Greater uncertainty displayed with wider dispersion







The real rate of return.

  • The real rate of return.

  • The anticipated inflation factor.

  • The risk premium.



The return investors require for allowing others to use their money

  • The return investors require for allowing others to use their money

  • The annual percentage return realized on an investment



Inflation factor added to the real rate of return

  • Inflation factor added to the real rate of return



Example: 2% real-rate-of-return



Extra return over the risk free rate to compensate for market risk A higher rate of return is required to entice investors into a riskier investment

  • Extra return over the risk free rate to compensate for market risk A higher rate of return is required to entice investors into a riskier investment











Stockbroker

  • Stockbroker

  • Security Analyst

  • Portfolio Manager

  • Mergers and Acquisitions

  • Investment Banker

  • Financial Planner
















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