Chapter 1
Charles P. Jones, Investments: Analysis and Management,
12th 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
extremely important
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
Investment is study of 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 set of assets owned
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
Desire to manage and increase wealth
◦ Most individuals make investment decisions
sometime
◦ 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: the tradeoff
between expected return and risk
◦ Expected return does not usually equal realized
return

Risk: the possibility that the 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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

Investors manage
risk at a cost - lower
expected returns (ER)
Financial Futures
Any level of expected
return and risk can
Corporate Bonds
be attained
ER
Puts & Calls
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 unknown and must be
estimated
Foreign financial assets: opportunity to
diversify
The Internet and investment opportunities
Institutional investors
Ethics
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