Understanding Investments

Chapter 1 Charles P. Jones, Investments: Analysis and Management, Eleventh Edition, John Wiley & Sons
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Learning Objectives
To learn: What is investing ? As a Process Trade-off: Consumption Vs. Saving Why Invest ? Individuals Institutions To learn how proper investment decisions enhance investors economic welfare To learn how to form realistic expectations about the outcome of investment decisions
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Investments Defined
Investing is the process of committing funds to one or more assets
Emphasis on holding financial assets and marketable securities Concepts also apply to real assets/alternative investments Foreign financial assets should be included

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Why to Invest?
All individuals make investment decisions at some point in life
Need sound framework for managing and increasing wealth Understand the Big Picture and the Background

Essential part of a career in the field

Security analyst, portfolio manager, registered representative, Certified Financial Planner, Chartered Financial Analyst
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Investment Decisions
Underlying investment decisions: the tradeoff between expected return and risk
Expected return is not the same as realized return most of the time

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

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The Tradeoff Between Expected Return and Risk

Investors wanting lower risk must accept 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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The Investment Decision Process

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? EMT is a theoretical proclamation. How and when should portfolio be revised? How should portfolio performance be measured?
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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 or reduce risk Quick adjustments needed to a changing environment The Internet and on-line trading/investment opportunities Institutional investors important
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Information Sources
Library Resources: 1. Moodys/Mergent Manuals 2. Standard and Poors: Industry Surveys 3. Value Line Investment Survey Internet Websites: Yahoo Finance Marketwatch Bloomberg
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