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

2.  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

3.  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

4.  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

5.  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

6.  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

7.  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

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

9. Copyright 2013 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back- up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein. 1- 9