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FIN 501 (31)
Chapter 3

CFIN501- Chapter 3- The Investment Process.docx

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Ryerson University
FIN 501
Edward Blinder

CFIN501 Chapter 3 The Investment ProcessThe Investment Policy StatementDifferent investorsoVery activebuying and selling frequentlyoInactivebuying and holding for long periods of timeoWilling bear substantial risk in seeking out returnsoSafetyprimary concernInvestmentdeferred consumptionObjectives Risk and ReturnRiskadversedislike risk and want to expose themselves to minimum risk level possibleoLarger return is associated with larger risks trade offIndividualbalance return objectives with risk toleranceEvaluating suitability of investment strategyrisk toleranceoRisk is not a simple conceptInvestor constraintsResourcescertain types of investments and investment strategies either explicitly or effectively have minimum requirementsoFrequent minimum commission levels account fees and other costs associated with securitiesHorizonplanned life of the investmentoStocks outperformed the other investments in the long runShort period over which they did much worseLiquiditypossibility that an asset will need to be sold quicklyoAsset with high degree of liquidsold quickly without a significant price concessionoDimensionsany asset can be sold quickly and easily if the price is cut sufficientlyoDifficult to measure preciselysome assets are clearly more much liquid than othersTaxesdifferent types of investments are taxed very differentlyoAfter tax returntaxes are a vital considerationHigher tax bracket investors will naturally seek investment strategies with favorable tax treatmentsLower tax bracket investors will focus more on pretax returnsWay in which investments are held can dramatically affect its tax statusTax laws and other rules are in a constant state of fluxCertain types of accounts retirement saving accounts receive preferential tax treatmentTax break can be enormousamount you can invest each year is strictly limitedLots of rules regarding when you can withdraw the moneyimportant to pay careful attention to themoRRSPcontribute their savings into the planContributions are tax deductibleLater when they retireowe income taxes on whatever they take out of the accountUnique Circumstancesdouble your money immediately with complete certaintyoDifficulty to envision any other investment with such a favorable payoff opportunity should probably be taken even though there may be some undesirable liquidity tax or horizon considerationoInvest only in companies consider to be socially or politically suitableInvest primarily in their own community or stateoCorporate insidersface regulatory and legal restrictions on they investingoPolitical officeholdersavoid some types of investments out of concern for conflicts of interestStrategies and policies1
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