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, registered
representative, Certified Financial Planner,
Chartered Financial 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) Stocks
Any level of ER Bonds
expected return and
risk can 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 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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