Chapter 1: The Investment Environment

History of Investment

1954 BC - Code of Hammurabi
1600s - Merchant Banks
- 1602 - first stack market Amsterdam
- 1637 Tulip builb bubble & collapse
1792 - N.Y. stock exchange (1933 -> 1st securities act)
1861 - Toronto Stock exchange -> 18 companies
1929 - Crach “Bad things happenning to good people”
1987 - “Black Monday”
2000 - Dot com bubble & crash (2010 - 2012 -> equity return)
2008 - Financial Crisis (housing bubble)

Types of Investment

Debt: Issuer borrows money from investors
Equity: Issuer sells an ownership interest to investors

Chapter 2: Financial Markets and Instruments

Financial Instruments

Debt:

Short-term (< 1 year) -> Money market
Long-term (> 1 year) -> Bonds (loans, mortgages, LDOs, MBs)

Equity:

Common Share
Preferred Share
ADR

Chapter 3: Trading on Securities Markets

Markets and orders

Markets

Direct market
Brokered market
Dealer market
Auction market

Orders

Market order
Limit order

Chapter 4: Risk and Return

Different investments carry different levels of risk and different levels of return. A 30 day treasury bill issued by the Government of Canada is not as risky as a ten year bond issued by Canadian Tire say. If the two investments paid the same return to investors, no one would buy the Canadian Tire bond. Investors must be compensated for the risk, or they won’t invest. We saw from the historical survey on investment returns, that generally, investors are compensated for risk. Equity investors have earned higher rates of return over the long term than debt investors have, etc.

Chapter 5: Capital Allocation to Risky Assets

Risk and Risk Aversion

The utility value of any investment or investment portfolio refers to the attractiveness of that investment’s risk/return profile.

Chapter 7: Capital Asset Pricing Model

Modern portfolio theory is a mathematical framework for building a portfolio of risky assets in order to optimize the expected return for a given level of risk. It reveals that since it is the return and risk of the portfolio that is of utmost importance, securities should be managed by their contibution to increasing the return and reducing the risk of the portfolio, rather than based on the risk and return levels for each individual security.