Introduction to Investing

Chapter 1 Charles P. Jones, Investments: Analysis and Management, Tenth Edition, John Wiley & Sons Prepared by G.D. Koppenhaver, Iowa State University

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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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Investments Defined

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

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Why Study Investments?

Most individuals make investment decisions sometime

Need sound framework for managing and increasing wealth Security analyst, portfolio manager, registered representative, Certified Financial Planner, Chartered Financial Analyst
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Essential part of a career in the field

Investment Decisions

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

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The Tradeoff Between Expected Return and Risk

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

Stocks

ER

Bonds

Risk-free Rate
Risk
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The Investment Decision Process

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?

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Factors Affecting the Process

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
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