1-1 Chapter 1 Charles P. Jones, Investments: Analysis and Management, Tenth Edition, John Wiley & Sons Prepared by G.D. Koppenhaver, Iowa State University Understanding Investments

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 Objectives

1-3 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 Investments Defined

1-4 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, registered representative, Certified Financial Planner, Chartered Financial Analyst Why Study Investments?

1-5 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 Investment Decisions

1-6 Investors manage risk at a cost - lower expected returns (ER) Any level of expected return and risk can be attained Risk ER Risk-free Rate Bonds Stocks The Tradeoff Between Expected Return and Risk

1-7 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? The Investment Decision Process

1-8 Uncertainty in ex post 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 changing environment The Internet and investment opportunities Institutional investors important Factors Affecting the Process

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