Francis&IbbotsonChapter 1:The Investment Setting1 1Chapter 1The Investment Setting第1页，共266页。Francis&IbbotsonChapter 1:The Investment Setting2 2What is Investing?Criteria used to determine whether an investment of money is investing or something else,including:Is it short-term or long-term?Is it productive or unproductive?Is it legal or illegal?Is it rational or irrational?第2页，共266页。Francis&IbbotsonChapter 1:The Investment Setting3 3Gambling vs.SpeculatingGambling occurs whenOutcome is determined very quickly(a roll of the dice,for instance)A source of entertainmentOutcome is not based on an economic endeavor,but,rather,random outcomesCreates risk without expectation of economic benefitSpeculation occurs whenAn asset is purchased with hope that price will rise rapidly,leading to quick profitNot based on random outcomesExample:Buying an IPO of a stock on the first day hoping to sell it in several days at a higher price第3页，共266页。Francis&IbbotsonChapter 1:The Investment Setting4 4Assets of ChoiceMajor asset classes includePrimary securities such as common and preferred stock,government bonds,corporate bonds,Treasury bills,commercial paperDerived instruments such as mutual funds,put and call options,forward and futures contractsPhysical assets such as houses,land,buildings,diamonds,gold第4页，共266页。Francis&IbbotsonChapter 1:The Investment Setting5 5Other IssuesLarge international corporations have their securities traded somewhere in the world 24 hours a dayWhile other areassuch as China and Africa have a larger population than the U.S.,the U.S.has the highest Gross National Product(GNP)a measure of a nations incomeHowever,when allocating a countrys GNP across the countrys population,the U.S.ranks 6thBut after adjusting for each countrys cost of living,the U.S.ranks 2nd behind Luxembourg第5页，共266页。Francis&IbbotsonChapter 1:The Investment Setting6 6The Worlds Equity CapitalWorlds equity capital is concentrated in North America,western and central Europe and the Pacific Rim(mostly Japan)Because market prices are rather volatile,this situation can change rapidly.For instance,from 1989-1990 Japans stock market was worth more than the U.S.stock market.第6页，共266页。Francis&IbbotsonChapter 1:The Investment Setting7 7The Worlds Bond Market第7页，共266页。Francis&IbbotsonChapter 1:The Investment Setting8 8The Worlds Bond Market第8页，共266页。Francis&IbbotsonChapter 1:The Investment Setting9 9Worlds Real&Human CapitalValue of worlds real assets financial assetsWorlds human capital greatly exceeds combined worlds real and financial capitalIncome from human capital is 80%of the worlds incomeHuman capital represents the stock of ideas and information possessed by humansFor instance,the capital contained within a tool doesnt come from the tool itself,but from the knowledge of how to build and use the tool第9页，共266页。Francis&IbbotsonChapter 1:The Investment Setting1010The U.S.Financial MarketsResidential real estate is one of the larger investments made by U.S.citizens.However,this may change in the future.第10页，共266页。Francis&IbbotsonChapter 1:The Investment Setting1111U.S.Equity InvestorsIndividual investorsOver 50 million in the U.S.Typically own only a few stocks with aggregate value of$15,000Have a small impact on U.S.equities marketMostly amateurs who play the marketInstitutional investorsInclude pension funds,mutual funds,life insurance companies,commercial bank trust departments,etc.In 2019 controlled 60%of market value of U.S.equities with individual investors controlling remainderHouseholds own much of the money managed by institutional investorsFrequently buy shares in blocks of 10,000 or moreBlock trades account for 51%of volume on NYSE第11页，共266页。Francis&IbbotsonChapter 1:The Investment Setting1212U.S.Market for Bonds第12页，共266页。Francis&IbbotsonChapter 1:The Investment Setting1313The Bottom LineIn determining whether a gamble,a speculation or an investment has occurred,it is useful to examine the length of the holding periodEven though there are millions of individual investors,their impact on the U.S.equities market is smallInstitutional investors(such as pension funds,insurance companies,mutual funds)have a much greater impact on the U.S.markets第13页，共266页。Francis&IbbotsonChapter 1:The Investment Setting1414Appendix:Opportunities and Salaries in InvestmentsInvestment Counsel.FirmBankSecurity Broker/DealerInsurance CompanyMutual Fund Mgmt.Co.Plan Sponsor/Endow./Foundat.Pension Consult.Firm2019 Median Salary$113,150$90,000$90,000$107,000$110,000$92,750$80,0002019 Median Bonus$50,000$30,000$85,000$35,000$70,000$11,000$12,5002019 Median Non-Cash Compensation$9,000$10,000$8,000$5,000$20,000$200$2,000Median Total Compensation$185,000$128,000$185,000$150,000$196,000$104,200$95,00090th Percentile$682,265$365,111$757,108$430,769$814,603$294,412$256,250第14页，共266页。Francis&IbbotsonChapter 2:Rates of Return1515Chapter 2Rates of Return第15页，共266页。Francis&IbbotsonChapter 2:Rates of Return1616BackgroundInvestors want to maximize their returns(or wealth)