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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

Thomson Learning/ South-Western 2004

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

Thomson Learning/ South-Western 2004

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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.

Thomson Learning/ South-Western 2004

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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 Real Assets e.g. land

Thomson Learning/ South-Western 2004

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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 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.

Thomson Learning/ South-Western 2004

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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.

Thomson Learning/ South-Western 2004

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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

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