Professional Documents
Culture Documents
Eighth Edition
An Introduction to Investment_CH1
Objectives
Investment Goals
Deferent Between Liquidity and Marketability Distinguish Between Primary and Secondary
Market
Identify the Sources of Risk and the Sources of
Return
Financial Markets are Efficient
(e.g., Stocks, Bonds, Derivatives) owned by the investor and designed to transfer purchasing power to the future
physical asset ( e.g., plant, equipment, or inventory). Investment (in Lay Term): Acquisition of an asset such as a stock or a bond. Secondary market: A market for buying and selling previously issued securities. Primary market: The Initial sale of securities.
of future benefits. Valuation: The process of determining the current worth of an asset, In some cases it is relatively easy, but in others are not so readily identified. Return: The sum of income plus capital gains earned on an investment in an asset. Income: The flow of money or its equivalent produced by an asset; dividends and interest.
investment. Risk: The Possibility of loss; the uncertainty of future returns. Speculation: An investment that offers a potentially large return but is also very risky; a reasonable probability that the investment will produce a loss. Marketability: The ease with which an asset may be bought and sold. Liquidity: Moneyness; the ease with which assets can be converted into cash with little risk of loss of principal.
Sources of Risk
Systematic risk: Associated with
Sources of Risk
Total Risk
Business Risk
Financial risk
Market Risk
Sources of Risk
Business risk: The risk associated with the nature
of a business. Financial risk: The risk associated with a firm's sources of financing. Market Risk: Systematic risk; the risk associated with the tendency of a stock's price to fluctuate with the market. Interest Rate Risk: The uncertainty associated with changes in interest rates; the possibility of loss resulting from increases in interest rates.
Sources of Risk
Reinvestment Rate Risk: The risk associated with
reinvesting earning or principal at a lower rate than was initially earned. Purchasing Power risk: The uncertainty that future inflation will erode the purchasing power of assets and income. Exchange Rate Risk: The uncertainty associated with changes in the value of foreign currencies.
financial markets. Financial Markets tend to be very efficient Efficient markets imply that investors cannot expect on average to beat the market consistently. So, they should not consistently under perform the market. Thus, efficient financial markets imply that investors should, over and extended period of time, earn neither excessively positive nor excessively negative returns.