FINA 2802: Investments and Portfolio FINA 2802: Investments and Portfolio AnalysisAnalysis

Course OverviewCourse Overview

Dragon Yongjun TangDragon Yongjun Tang

January 12, 2010January 12, 2010

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Why do I care?Why do I care?

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Balance Sheet – U.S. Households

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The Courage to Be The Courage to Be RichRich This will be the best course you This will be the best course you

ever take! (financially speaking.)ever take! (financially speaking.)

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Plan for todayPlan for today

IntroductionIntroduction Learning objectivesLearning objectives Grading policiesGrading policies Class scheduleClass schedule Lecture 1: Investment Lecture 1: Investment

BackgroundBackground

My teaching styleMy teaching style

No-nonsenseNo-nonsense Practical, informative, first-hand Practical, informative, first-hand

experienceexperience Not for exam-takersNot for exam-takers A lot extra credit opportunitiesA lot extra credit opportunities Easy to get A for serious Easy to get A for serious

investorsinvestors

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Who is he?Who is he?

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1010

1111

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Learn from the gurusLearn from the gurus

Success breeds successSuccess breeds success Strive for the bestStrive for the best Be creativeBe creative

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““ It's not what we don't know It's not what we don't know that prevents us from that prevents us from succeeding; it's what we succeeding; it's what we know that just ain't so that is know that just ain't so that is our greatest obstacle.”our greatest obstacle.” --- --- Josh BillingsJosh Billings

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Lecture 1: Lecture 1: Background and IssuesBackground and Issues Reading: Chapter 1Reading: Chapter 1 Practice Problem Sets: Practice Problem Sets:

1,2,4,5,7,9,11,14,161,2,4,5,7,9,11,14,16

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Objectives

Define “Investment”

Distinguish between real assets and financial assets.

Describe the major steps in the construction of a portfolio.

Identify major participants in financial markets.

Recent trends

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InvestmentInvestment

CurrentCurrent commitment commitment FutureFuture benefit benefit

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InvestmentInvestment

What major investments have you ever made?

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Investment VehiclesInvestment Vehicles

Real assetsReal assets Financial assetsFinancial assets

Financial assets are means to Financial assets are means to distribute the consumption of distribute the consumption of real assets.real assets.

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Type of Financial Type of Financial AssetsAssets

Financial Market

Fixed-income (Bonds) Equity (Stocks) Derivatives

FIN 0804 FINA 2802(This course)

FINA 0301

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Role of Financial Role of Financial AssetsAssets Information Content Transfer of Consumption through

time Allocation of Risk Separation ownership/control

- Agency Problems

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The Investment Process

Asset allocationAsset allocation Security selectionSecurity selection Risk-return trade-offRisk-return trade-off Market efficiencyMarket efficiency Active (bottom-up) vs. passive (top-Active (bottom-up) vs. passive (top-

down) managementdown) management

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30s 70% 30%40s 60 4050s 50 5060s 40 60

CommonAge Stocks Bonds

Example of Asset Example of Asset AllocationAllocation

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Example of Security Example of Security SelectionSelection

Your Stock Portfolio

Auto Retail Financial

Wal-MartNordstroms

Espirit

Bank of ChinaBerkshire Hathaway

HSBC

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There is no free lunch!There is no free lunch!

Return

Risk

less risk

lessreturn

more risk

morereturn

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Market EfficiencyMarket Efficiency

Security prices accurately reflect Security prices accurately reflect all relevant information.all relevant information.

How many efficient market How many efficient market theorists does it take to change a theorists does it take to change a light bulb?light bulb?

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Market EfficiencyMarket Efficiency

How many efficient market How many efficient market theorists does it take to change a theorists does it take to change a light bulb?light bulb?

None! If the light bulb needs to be None! If the light bulb needs to be changed, someone else must changed, someone else must have already done it.have already done it.

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Players in the Financial Markets Business Firms Business Firms –– net borrowers net borrowers Households Households –– net savers net savers Governments Governments –– can be both can be both

borrowers and saversborrowers and savers Investment BankersInvestment Bankers

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Recent Trends Recent Trends

Globalization Securitization Financial Engineering Computer Networks

Hong Kong up 60% in Hong Kong up 60% in 20092009

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Decision MakingDecision Making

1.1. Perceive the situationPerceive the situation

2.2. Possible actionsPossible actions

3.3. Evaluate the outcomesEvaluate the outcomes

4.4. Choose the action with the best Choose the action with the best outcomeoutcome

Which is the most important?Which is the most important?

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SummarySummary

Financial assetsFinancial assets Risk return tradeoffRisk return tradeoff Next class: Financial SecuritiesNext class: Financial Securities