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, Certified
Financial Planner, Chartered Financial Analyst,
Chartered Valuation Analyst.

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 Underlying investment decisions: the tradeoff
between expected return and risk
◦ Expected return is not usually the same as realized
return
 Risk: the possibility that the realized return
will be different than the expected return
◦ Investor risk tolerance affects expected return

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

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 (actual) 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 adapt to a
changing environment
 The Internet and investment opportunities
 Institutional investors important

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