Chapter 1Charles P. Jones, Investments: Analysis and Management,

12th Edition, John Wiley & Sons

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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◦ Being able to recognize pitfalls and scams

extremely important

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Objectives

Investment is study of process of committing funds to one or more assets◦ Emphasis on marketable securities◦ Concepts also apply to real assets

Funds to be invested come from assets owned, borrowed money, savings, foregone consumption

Portfolio is set of assets owned

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Desire to manage and increase wealth◦ Most individuals make investment decisions

sometime◦ Especially important for retirement

Essential part of a career in the field◦ Investment banker, security analyst, portfolio

manager, financial adviser, Chartered Financial Analyst

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Underlying investment decisions: the tradeoff between expected return and risk◦ Expected return does not usually equal realized

return Risk: the possibility that the realized return

will not equal expected return◦ Investors choose risk tolerance, then look to

maximize returns◦ Risk-return tradeoff is ex ante: made before

investment Ex post: after the fact (known)

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Investors manage risk at a cost - lower expected returns (ER)

Any level of expected return and risk can be attained

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Risk

ER

Risk-free Rate

Corporate Bonds

Common Stocks

Puts & Calls

Financial Futures

Two-step process:◦ Security analysis and valuation

Estimate expected returns and risk◦ Portfolio management

Once portfolio constructed, must be evaluated Evaluations used to revise portfolio

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Uncertainty: the future unknown and must be estimated

Foreign financial assets: opportunity to diversify

The Internet and investment opportunities Institutional investors Ethics

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