Download - understanding investment

7/30/2019 understanding investment

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Understanding

InvestmentsChapter 1

Charles P. Jones, Investments: Analysisand Management,

Eleventh Edition, John Wiley & Sons

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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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Learning Objectives


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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 atsome 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, registeredrepresentative, Certified Financial Planner,Chartered Financial Analyst

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Investment Decisions

Underlying investment decisions: the tradeoffbetween 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 expectedreturn 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

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Risk

ER

Risk-free Rate

Bonds

Stocks


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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 postreturns dominatesdecision process Future unknown and must be estimated

Foreign financial assets: opportunity toenhance return or reduce risk

Quick adjustments needed to a changingenvironment

The Internet and on-line trading/investmentopportunities

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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