1-1

Chapter 1
Charles P. Jones, Investments: Analysis and
Management,
Tenth Edition, John Wiley & Sons
Prepared by
G.D. Koppenhaver, Iowa State University
Understanding
Investments
1-2
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
Objectives
1-3
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
Investments Defined
1-4
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
Why Study Investments?
1-5
Underlying investment decisions: the
tradeoff between expected return and
risk
Expected return is not usually the same as
realized return
Risk: the possibility that the realized
return will be different than the
expected return
Investor risk tolerance affects expected
return
Investment Decisions
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Investors manage
risk at a cost -
lower expected
returns (ER)
Any level of
expected return
and risk can be
attained
Risk
ER
Risk-free Rate
Bonds
Stocks
The Tradeoff Between
Expected Return and Risk
1-7
Two-step process:
Security analysis and valuation
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?
The Investment Decision Process
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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 a
changing environment
The Internet and investment
opportunities
Institutional investors important
Factors Affecting the Process
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