W. Sean Cleary
Charles P. Jones
Analysis and Management
Second Canadian Edition

• Define investment and discuss what it means to study investments.
• Explain why risk and return are the two critical components of all investing decisions.
• Outline the two-step investment decision process.
• Discuss key factors that affect the investment decision process.

• 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

• Primary Objectives
 Safety of principal
 Income

Growth of capital
• Secondary Objectives
 Liquidity
 Tax minimization

• Possible constraints for investors include:
 Legal





Moral / Ethical
Emotional – including investment knowledge and risk tolerance
Basic minimum income to be provided by the portfolio
Realism – an understanding that some objectives are unrealistic (e.g., high returns with low risk)
Other (e.g., illness, pending divorce, etc.)

• Objectives and constraints must be related to the three primary investment objectives of safety , income , and growth , and to the secondary objectives of liquidity and tax minimization .



The importance of safety relates to: risk, market timing, inflation, return, and emotion
The importance of income relates to: taxation, return, risk, inflation, and basic minimum income
The importance of growth relates to: taxation, risk, return, market timing, and emotional considerations

• Most individuals make investment decisions sometime
 Individuals need sound framework for managing and increasing wealth
• Essential part of a career in the field
 Security analyst, portfolio manager, investment advisor, financial planner, Chartered Financial
Analyst

• Underlying investment decisions: the tradeoff between expected return and risk
• Return: expected return is not usually the same as realized return
• Risk: the possibility that the realized return will be different than the expected return

• Investors manage risk at a cost – lower expected returns (ER)
• Any level of expected return and risk can be attained
ER
Bonds
Stocks
Risk-free Rate
Risk

RT
12
High
10
8
RELATION RISQUE-RENDEME
RISK- EXPECTED RETURN RELATIONSHIPS
Options/Futures
Art objects
Coins and stamps
Real estate (commercial)
Common shares
Real estate (residential) Rendement
2
0
0
Treasury bills
2 4 6 Risk 8 10 12 High

• Two-step process:


Security analysis
• Necessary to understand security characteristics and applied to these securities to estimate their price or value
Portfolio management
• Selected securities viewed as a single unit
• How and when should it be revised?
• How should portfolio performance be measured?

• Uncertainty in ex post returns dominates decision process
 Future unknown and must be estimated
• Foreign financial assets – opportunity to enhance return and/or reduce risk
• Investors must now cope with a changed investing environment
• Internet changes investments environment
• Institutional investors are important
• How efficient are financial markets in processing new information?

Main issues:
• The accountability of the Board of Directors and
Management
• A re-examination of accounting and auditing practices
• Management compensation arrangements such as executive stock option plans
• Disclosure requirements
• The effectiveness of existing regulatory bodies

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