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Chapter1 4

1) The document discusses different approaches to investing such as investing in individual stocks, index funds, mutual funds, bonds, or gold. It also discusses trading frequently versus buying and holding. 2) It notes that getting high returns depends on many economic factors and that even actively managed mutual funds often struggle to outperform the market. 3) The document provides an overview of different types of investment companies including mutual funds, unit investment trusts, closed-end funds, and exchange traded funds (ETFs). It discusses key characteristics such as how their prices are determined.

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Yun Clare Yang
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70 views14 pages

Chapter1 4

1) The document discusses different approaches to investing such as investing in individual stocks, index funds, mutual funds, bonds, or gold. It also discusses trading frequently versus buying and holding. 2) It notes that getting high returns depends on many economic factors and that even actively managed mutual funds often struggle to outperform the market. 3) The document provides an overview of different types of investment companies including mutual funds, unit investment trusts, closed-end funds, and exchange traded funds (ETFs). It discusses key characteristics such as how their prices are determined.

Uploaded by

Yun Clare Yang
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 14

Chapters 1-4

Introduction

To get high returns


What will you do?
Invest in individual stocks? Index funds? Famous mutual funds? Bonds? Gold?... Trade frequently? Buy and hold? Listen to analysts? Do your own analysis?

Our approach: academic + CFA

To get high returns


Return of a security depends on many factors
Different scenarios such as poor or good economy, strong or weak demand for some products

How to beat the market?


Answer: its hard Evidence: even actively managed mutual funds find it hard

We will learn how to avoid mistakes We will learn useful techniques


Your investment results depend on

Investment companies
Mutual funds are a popular type of investment companies Other investment companies include unit investment trusts, closed-end funds,

Unit Investment Trusts


A sponsor (typically a brokerage firm) buys a portfolio of securities (e.g., municipal bonds, which are deposited into a trust). It then sells shares, or units, in the trust to the public. Unmanaged: the portfolio is fixed. Investors may sell the units back to the trustee for Net Asset Value (NAV).
The trustee get the cash needed by selling new shares to the public or liquidating part of the portfolio NAV = (Market Value of Assets Liabilities) / Number of Shares Outstanding
calculated at the end of the day

Managed Investment Companies


Open-End funds
Usually called mutual funds
Open-end: shares outstanding change when new shares are sold or old shares are redeemed
Priced at NAV

Accounting for 90% of assets of investment companies

Some mutual fund companies offer passively managed index funds. E.g.?

Managed Investment Companies


Closed-End funds
no change in shares outstanding Traded in stock exchanges

Priced at possibly significant premium or discount to NAV


What are the usual time trends of premium or discount?

Why?

Exchange Traded Funds, ETFs


Index portfolios or bond portfolios or commodities Examples SPDRs and Tracker Fund (2800) Advantages
Traded continuously in stock exchanges Usually, priced at small premium or discount to NAV. Why? Usually, lower management expenses than mutual funds. Why?

Some ETFs may not be actively traded

Can Equity Mutual Funds beat the market?


Evidence: Average equity mutual fund performance < broad market performance (represented by indices) Conclusion: They couldnt consistently buy/sell underpriced/overpriced common stocks See later notes for details

Whys it hard to beat the market?


o Competitive markets and market efficiency: o Security prices reflect public information o Securities: neither underpriced nor overpriced

significantly
o Whether we believe markets are efficient affects

our choice of investment management style.


o The textbook: the market is nearly efficient o Who recently won the Nobel prize in economics? o What do you think?

Then, how should we invest?


The answers are complicated, and there are two interrelated issues (to be elaborated in later chapters):
Top-down vs. Bottom-up Investment Process Active vs. Passive Management

Top-down Investment Process


o Asset allocation
Choosing the investment weights in asset classes
Stocks Bonds Money market securities Alternative Assets

o Security selection & analysis


Choosing specific securities within an asset class

Top-down Investment Process


o Why top-down, not bottom-up?

Active vs. Passive Management


Active Management (assuming inefficient markets) Finding underpriced securities Security selection Timing the market e.g., buy more stocks or invest in

asset allocation funds or hedge funds

Passive Management (assuming efficient markets) No attempt to find underpriced securities Indexing No attempt to time the market Constructing an optimal portfolio Holding a diversified portfolio
based on risk aversion

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