Investment

Investment
Investment is the thing that really makes our economy go and grow! Investment is any NEW
Plant and equipment

Investment is any NEW

Additional inventory

Investment is any NEW

Residential housing

6-14

Inventory Investment
Includes only net

change

Date Jan. 1, 2003

Level of Inventory $120 million 145 million 130 million

July 1, 2003 Dec. 31, 2003

Copyright 2002 by The McGraw-Hill Companies, Inc !ll rights reser"e#

6-1$

Inventory Investment
Includes only net
Date Jan. 1, 2003 July 1, 2003 Dec. 31, 2003 !nded the year ith

change
Level of Inventory $120 million 145 million 130 million

Started the year ith $120 million 130 million

"he net chan#e i$ a %&' 10 million

Copyright 2002 by The McGraw-Hill Companies, Inc !ll rights reser"e#

6-16

Inventory Investment
Includes only net
Date Jan. 1, 2003 July 1, 2003 Dec. 31, 2003 !nded the year ith

(Continued)

change
Level of Inventory $130 million 145 million 120 million

Started the year ith $130 million 120 million 10 million 6-1%

"he net chan#e i$ a %('

Copyright 2002 by The McGraw-Hill Companies, Inc !ll rights reser"e#

In"entory In"estment, 1'60-2000 (in billions o) 1'&% #ollars*

75 50

25

25

1960

1965

1970

1975

1980

1985

1990

1995

2000

This is the most "olatile sector o) in"estment +ote that in"estment was act,ally negati"e #,ring three recessions
Copyright 2002 by The McGraw-Hill Companies, Inc !ll rights reser"e#

6-1&

Types of investment
Cash investment Debt securities Stocks Mutual funds Derivatives Commodities eal estates

 Cash investments !hese include savings bank accounts" certificates of de#osit$ !hese investments #ay a low rate of interest and are risky o#tions in #eriods of inflation Debt securities: The standard definition of a security is: "A legal contract representing the right to receive future benefits under a stated set of conditions" !his form of investment #rovides returns in the form of fi%ed #eriodic #ayments and #ossible ca#ital a##reciation at maturity$ &t is a safer and more 'risk(free' investment tool than e)uities$ *owever" the returns are also generally lower than other securities

 Stoc s: +uying stocks ,also called e)uities- makes you a #art owner of the business and entitles you to a share of the #rofits generated by the com#any$Stocksaremorevolatileandriskiertha nbonds$ !utual funds: !his is a collection of stocks . bonds and involves #aying a #rofessional manager to select s#ecific securities for you$ !he #rime advantage of this investment is that you do not have to bother with tracking the investment$

 Commodities: !he items that are traded on the commodities market are agricultural and industrial commodities$ !hese items need to be standardi/ed and must be in a basic" raw and un#rocessed state$ !he trading of commodities is associated with high risk and high reward$ !rading in commodity futures re)uires s#eciali/ed knowledge and in( de#th analysis $

 Real estate 0!his investment involves a long(term commitment of funds and gains that are generated through rental or lease income as well as ca#ital a##reciation$ !his includes investments into residential or commercial #ro#erties Derivatives 0 !hese are financial contracts the values of which are derived from the value of the underlying assets" such as e)uities" commodities and bonds" on which they are based$ Derivatives can be in the form of futures" o#tions and swa#s$ Derivatives are used to minimi/e the risk of loss resulting from fluctuations in the value of the underlying assets ,hedging-$

The Investment Process

A description of the process is:
"# Set investment policy
$b%ectives Amount Choice of assets

&# Conduct security analysis

'(amine securities )identify those *hich are mis priced+,

-se
a# Technical analysis . the e(amination of past prices for trends b# /undamental analysis . true value based on future e(pected returns

The Investment Process

0# Portfolio Construction
Identify assets Choose e(tent of diversification

1# Portfolio Evaluation
Assess the performance of portfolio

2# Portfolio Revision
Repeat previous three steps