Chapter 1 Charles P.

Jones, Investments: Principles and Concepts, 11th Edition, John Wiley & Sons

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Objectives

To understand the investments field as currently practiced To help you make investment decisions that will enhance your economic welfare To create realistic expectations about the outcome of investment decisions

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Investments is the study of the process of committing funds to one or more assets
Emphasis on holding financial assets and marketable securities Concepts also apply to real assets Foreign financial assets should not be ignored

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Most individuals make investment decisions sometime

Need sound framework for managing and increasing wealth

Essential part of a career in the field

Security analyst, portfolio manager, registered representative, Certified Financial Planner, Chartered Financial Analyst

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Underlying investment decisions: the tradeoff between expected return and risk

Risk: the possibility that the realized return will be different than the expected return
Investor risk tolerance affects expected return

Expected return is not usually the same as realized return

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Investors manage risk at a cost - lower expected returns (ER) Any level of expected return and risk can be attained

Stocks

ER

Bonds

Risk-free Rate
Risk
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Two-step process:
Security analysis and valuation
Necessary to understand security characteristics

Portfolio management
Selected securities viewed as a single unit How efficient are financial markets in processing new information? How and when should it be revised? How should portfolio performance be measured?

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Uncertainty in ex post returns dominates decision process Foreign financial assets: opportunity to enhance return or reduce risk Quick adjustments needed to a adapt to a changing environment The Internet and investment opportunities Institutional investors important
Future unknown and must be estimated

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