Understanding Investments Chapter 1 Charles P Jones Investments
- Slides: 8
Understanding Investments Chapter 1 Charles P. Jones, Investments: Analysis and Management, Tenth Edition, John Wiley & Sons Prepared by G. D. Koppenhaver, Iowa State University 1 -1
Objectives n n n 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 2
Investments Defined n Investments is the study of the process of committing funds to one or more assets Ø Ø Ø Emphasis on holding financial assets and marketable securities Concepts also apply to real assets Foreign financial assets should not be ignored 3
Why Study Investments? n Most individuals make investment decisions sometime Ø n Need sound framework for managing and increasing wealth Essential part of a career in the field Ø Security analyst, portfolio manager, registered representative, Certified Financial Planner, Chartered Financial Analyst 4
Investment Decisions n Underlying investment decisions: the tradeoff between expected return and risk Ø n Expected return is not usually the same as realized return Risk: the possibility that the realized return will be different than the expected return Ø Investor risk tolerance affects expected return 5
The Tradeoff Between Expected Return and Risk n n 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 6
The Investment Decision Process n Two-step process: Ø Security analysis and valuation n Ø Necessary to understand security characteristics Portfolio management n n 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? 7
Factors Affecting the Process n Uncertainty in ex post returns dominates decision process Ø n n 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 investment opportunities Institutional investors important 8
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