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Understanding Investments

This chapter introduces investments and defines key concepts. It aims to help readers understand the investments field, make decisions that enhance their economic welfare, and set realistic expectations. Investments involve committing funds to assets with the goal of holding financial securities. The chapter explains why studying investments is important for both individual and career decision-making. It outlines the underlying tradeoff between risk and expected return that influences all investment decisions.

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Razafinandrasana
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45 views

Understanding Investments

This chapter introduces investments and defines key concepts. It aims to help readers understand the investments field, make decisions that enhance their economic welfare, and set realistic expectations. Investments involve committing funds to assets with the goal of holding financial securities. The chapter explains why studying investments is important for both individual and career decision-making. It outlines the underlying tradeoff between risk and expected return that influences all investment decisions.

Uploaded by

Razafinandrasana
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Understanding

Understanding
Investments
Investments
Chapter 1
Jones, Investments:
Analysis and Management

1
Objectives
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 2
Investments
Investments Defined
Defined
 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
3
Why
Why Study
Study
Investments?
Investments?
 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
4
Investment
Investment
Decisions
Decisions
 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
5
The
The Tradeoff
Tradeoff
Between
Between ER
ER and
and Risk
Risk
 Investors
manage risk at a Stocks
cost - lower
ER Bonds
expected
returns (ER)
 Any level of
expected return Risk-free Rate
and risk can be Risk
attained
6
The
The Investment
Investment
Decision
Decision Process
Process
 Two-step process:
– Security analysis and valuation
» Necessary to understand security
characteristics
– Portfolio management
» Selected securities viewed as a single
unit
» How and when should it be revised?
» How should portfolio performance be
measured?
7
Factors
Factors Affecting
Affecting the
the
Process
Process
 Uncertainty in ex post returns
dominates decision process
– Future unknown and must be estimated
 Foreign financial assets: opportunity
to enhance return or reduce risk
 Institutional investors important
 How efficient are financial markets in
processing new information?

8
The
The Rise
Rise of
of the
the
Internet
Internet
 Revolutionized the flow of
investment information
 Dramatically lowered commission
rates for individual investors

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