Investments: An Introduction
10e
Chapter
1: An Introduction to Investments
Herbert B. Mayo
Introduction of Portfolio
Construction
•
•
•
•
Income is either spent or saved.
Savings are invested.
The investments constitute a portfolio.
The composition of a portfolio depends
on investment goals.
• Not all assets are appropriate for all
financial goals.
2
Possible Investment Goals
• Funds to meet emergencies
• Funds to finance education
expenses
• Funds to make a specified
purchase (e.g., a home)
• Funds for retirement
3
Preliminary Definitions
• Investments: lay usage v. economics
• Primary and secondary markets
• Value and valuation
4
Preliminary Definitions
• Return: income and capital gains
• Return in monetary units and
percentages
5
Preliminary Definitions
• Risk:
– possibility of loss
– Uncertainty of future returns
6
Preliminary Definitions
• Risk: differentiated from speculation
• Marketability and liquidity of an asset
7
Diversification and
Asset Allocation
• Reduction in asset specific risk
• Allocation of assets among alternatives such as
–
–
–
–
–
Stocks
Bonds
Money market instruments
Precious metals
Real estate
8
Efficient and Competitive Markets
• Financial markets are efficient because:
– Competition exists among investors;
– Participants may readily enter and exit
financial markets, and
– Information is readily available.
9
Efficient Markets
• Efficient markets implies:
– The investor should not expect to
consistently outperform the market.
10
Portfolio Assessment
• Popular press places emphasis on return.
• Higher return requires accepting more risk.
• Assessment should consider both the
return and the risk taken to achieve the
return.
11
The Internet
• Major source of information concerning
investments
• Information is often available for little or
no cost.
• Problem of inaccurate or biased
information
12
The Importance of
•
•
•
•
Beliefs
Investment philosophy
Understanding yourself
Available time to make investment
decisions
• The investor’s resources
13