CHAPTER ONE
Practical Investment Management
Robert A,Strong
THE CONCEPT OF INVESTING
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To consume,to save,or to invest
a dollar that is earned?
Both saving and investing amount to
consumption shifting through time.
Investing Defined
However,saving involves little,if any,
risk,while investing is a risky
endeavor.
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Assets
Financial Assets Real Assets
e.g,bond,stock e.g,land
Assets are things that people own.
Investment Alternatives
Financial assets have a
corresponding liability,while real
assets do not.
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Securitization is the process of converting an
asset or collection of assets into a more
marketable form.
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.
Investment Alternatives
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There are three broad categories of securities,
Securities
Equity
Securities
e.g,common
stock
Derivative
Assets
e.g,futures,
options
Fixed Income
Securities
e.g,bonds,
preferred stock
Investment Alternatives
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Why invest
Three Reasons for Investing
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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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.
The Academic Study of Investments
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Empirical research uses actual market data
rather than mathematical models.
An anomaly is an observed result that defies
explanation within the known theoretical
framework.
The Academic Study of Investments
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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.
The Academic Study of Investments
vs.
Professors Practitioners
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? Investing Defined
? Investment Alternatives
? Assets
? Securities
? Security Groupings
? Three Reasons for Investing
? Income
? Appreciation
? Excitement
Review
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? The Academic Study of Investments
? Theoretical Research
? Empirical Research
? Professors vs,Practitioners
Review