Chapter 2Fundamentals of Investing
Frank J. Fabozzi, Ph.D., CFA
Adjunct Professor of Finance School of Management Yale University
In this chapter the fundamentals of investing will be reviewed. We will explain these fundamentals in terms of the phases that are involved in investing. These phases include: setting investment objectives, establishing an investment policy, selecting a portfolio strategy, constructing a portfolio, and evaluating performance.
SETTING INVESTMENT OBJECTIVES
The investment process begins with a thorough analysis of the investment objectives of the entity whose funds are being invested. These entities can be classified as individual investors and institutional investors.
The objectives of an individual investor may be to accumulate funds to purchase a home or other major acquisition, to have sufficient funds to be able to retire at a specified age, or to accumulate funds to pay for college tuition for children.
Institutional investors include
- Pension funds
- Depository institutions (commercial banks, savings and loan associations, and credit unions)
- Insurance companies (life insurance companies, property and casualty insurance companies, and health insurance companies)
- Regulated investment companies (mutual funds)
- Endowments and foundations
- Treasury departments of corporations, municipal governments, and government agencies
In general we can classify institutional investors into two broad categories—those that must meet contractually specified liabilities ...
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