Chapter 1 Charles P. Jones, Investments: Analysis and Management, 12 th Edition, John Wiley & Sons 1- 1

 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 1- 2 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 1- 3

 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 1- 4

 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) 1- 5

 Investors manage risk at a cost - lower expected returns (ER)  Any level of expected return and risk can be attained 1- 6 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 1- 7

 Uncertainty: the future unknown and must be estimated  Foreign financial assets: opportunity to diversify  The Internet and investment opportunities  Institutional investors  Ethics 1- 8

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