Chapter 1

Charles P. Jones and Gerald R. Jensen,

Investments: Analysis and Management,
13th 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
◦ Being able to recognize pitfalls and scams is
extremely important

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 Investments - the study of the 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 the set of assets owned

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 Desire to manage and increase wealth
◦ All individuals make investment decisions
◦ Especially important for retirement
 Essential part of a career in the field
◦ Investment banker, security analyst,
portfolio manager, financial adviser,
Chartered Financial Analyst

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 Underlying investment decisions is the
tradeoff between expected return and risk
◦ Expected and realized return usually differ
 Risk: possibility that 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)

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 Risk and return are the two most prominent
characteristics in finance
 A fundamental principle of finance is that
there exists a positive relationship between
risk and expected (required) return
◦ Referred to as the risk - return tradeoff
 A strategy that yields consistently higher
returns should be regarded as riskier
unless documented otherwise
 Investors manage
risk at a cost →
lower expected
ER
returns (ER)
Corporate Bonds
 Any level of
expected return and
risk can be attained Common Stocks
Risk-free Rate

Risk

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 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

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

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