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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 A real asset is a tangible investment that has
an intrinsic value due to its substance and
physical properties.
 Commodities, real estate, equipment, and

natural resources are all types of real assets.

 Real assets provide portfolio diversification,

as they often move in opposite directions to

financial assets like stocks or bonds.
 Real assets tend to be more stable but less

liquid than financial assets.

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Credit default swaps, or CDS, are credit derivative
contracts that enable investors to swap credit risk on a
company, country, or other entity with another
counterparty.
Credit default swaps are the most common type of OTC
credit derivatives and are often used to transfer credit
exposure on fixed income products in order to hedge risk.
Credit default swaps are customized between the two
counterparties involved, which makes them opaque,
illiquid, and hard to track for regulators.
https://www.youtube.com/watch?v=bx_LWm6_6tA

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 A collateralized debt obligation is a
complex structured-finance product that is
backed by a pool of loans and other assets.
 These underlying assets serve as collateral if the
loan goes into default.
 Though risky and not for all investors, CDOs are
a viable tool for shifting risk and freeing up
capital.
 https://www.youtube.com/watch?v=2oyXK-
G7GiI&list=PLpTFTqQfnLCYvZMB2_k28G9hZsI70
oXds&index=1&t=1s

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 An exchange traded fund (ETF) is a basket of securities
that trade on an exchange just like a stock does.
 ETF share prices fluctuate all day as the ETF is bought
and sold; this is different from mutual funds that only
trade once a day after the market closes.
 ETFs can contain all types of investments including
stocks, commodities, or bonds; some offer U.S.-only
holdings, while others are international.
 ETFs offer low expense ratios and fewer broker
commissions than buying the stocks individually does.
 https://www.youtube.com/watch?v=A2KzjXqE6p4
 https://www.youtube.com/watch?v=OwpFBi-jZVg

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 Commercial paper is a form of unsecured,
short-term debt commonly issued by
companies to finance their payrolls, payables,
inventories, and other short-term liabilities.
 Maturities on most commercial paper ranges
from a few weeks to months, with an average
of around 30 days.
 Commercial paper is often issued at a discount
without paying coupons and matures to its face
value, reflective of current interest rates

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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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 Investors manage risk
at a cost - lower
expected returns (ER)
 Any level of expected Stocks
return and risk can be ER Bonds
attained

Risk-free Rate of Return

Risk

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 Two-step process:
◦ Security analysis and valuation / price calculation /
PV/ worth/ value/ fair price / fundamental price
 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 adapt to a
changing environment
 The Internet and investment opportunities
 Institutional investors important

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 What are ETFs and how are the working in
Pakistan:
https://www.psx.com.pk/psx/product-and-s
ervices/products/exchange-traded-funds-etf
s
 Define and explain what you understand by
following:
◦ CDO
◦ CDs
◦ Real Assets
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