INVESTMENTS:

AnalysisandManagement
ThirdCanadianEdition

W. Sean Cleary
Charles P. Jones
Prepared by
Khalil Torabzadeh
University of Lethbridge

Chapter 1
Understanding
Investments

Learning Objectives
Define investment and discuss what it means to
study investments.
Explain why risk and return are the two critical
components of all investing decisions.
Outline the two-step investment decision process.
Discuss key factors that affect the investment
decision process.

Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Investments Defined
Investments is the study of the process of
committing funds to one or more assets.
Emphasis is on holding marketable securities.
Concepts apply to financial assets and real
assets within domestic as well as international
markets.

Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Investment Objectives
Primary Objectives
Safety of principal
Income
Growth of capital

Secondary Objectives
Liquidity
Tax minimization

Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Investment Constraints
Possible constraints for investors include:

Legal
Moral/ethical
Emotional including investment knowledge and
risk tolerance
Basic minimum income to be provided by the
portfolio
Realism an understanding that some objectives
are unrealistic (e.g., high returns with low risk)
Other (e.g., illness, pending divorce, etc.)
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Primary and Secondary Objectives

Objectives and constraints must be related to the
three primary investment objectives of safety,
income, and growth, and to the secondary
objectives of liquidity and tax minimization.

The importance of safety relates to: risk, market

timing, inflation, return, and emotion
The importance of income relates to: taxation, return,
risk, inflation, and basic minimum income
The importance of growth relates to: taxation, risk,
return, market timing, and emotional considerations
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Why Study Investments?

Most individuals make investment decisions
sometime

Individuals need sound framework for

managing and increasing wealth

Essential part of a career in the field

Security analyst, portfolio manager, investment

advisor, financial planner, Chartered Financial
Analyst

Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Investment Decisions
Underlying investment decisions: the tradeoff
between expected return and risk
Return: expected return is not usually the same as
realized return
Risk: the possibility that the realized return will be
different than the expected return

Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

The Tradeoff Between ER and Risk

Any level of expected
return and risk can be
attained
The expected return
(ER) must be large
enough to compensate
for taking additional
risk

Stocks
ER

Bonds

Risk-free Rate
Risk

Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Typical Chart

Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

The Investment Decision Process

Two-step process:

Security analysis

Necessary to understand security characteristics

and applied to these securities to estimate their
price or value

Portfolio management

Selected securities viewed as a single unit

How and when should it be revised?
How should portfolio performance be measured?
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Factors Affecting the Process

Uncertainty in ex post returns dominates decision
process

Future unknown and must be estimated

Foreign financial assets opportunity to enhance

return and/or reduce risk
Investors must now cope with a changed investing
environment
Internet changes investments environment
Institutional investors are important
How efficient are financial markets in processing
new information?
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Corporate Governance
Main issues:
The accountability of the Board of Directors and
Management
A re-examination of accounting and auditing
practices
Management compensation arrangements such as
executive stock option plans
Disclosure requirements
The effectiveness of existing regulatory bodies
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Appendix 1A: The Chartered Financial

Analyst (CFA) Program
Individuals who are interested in the
investment area should consider seeking a
CFA designation
The CFA institute administers the Chartered
Financial Analyst curriculum and examination
program
Level I emphasizes tools and inputs
Level II emphasizes asset valuation
Level III emphasizes portfolio management

For more information: www.cfainstitute.org

Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Appendix 1B:
The Canadian Securities Institute (CSI)
Canadian Securities Institute (CSI)

The CSI offers the Canadian Securities Course (CSC),

which is a mandatory requirement for individuals who
wish to become licensed to sell financial securities in
Canada and to register to sell mutual funds

Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

Copyright
Copyright 2009 John Wiley & Sons Canada, Ltd. All rights
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