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Chapter 1Charles P. Jones, Investments: Analysis and Management,
12th Edition, John Wiley & Sons
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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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Objectives
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)
Any level of expected return and risk can be attained
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Risk
ER
Risk-free Rate
Corporate Bonds
Common Stocks
Puts & Calls
Financial Futures
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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Copyright 2013 John Wiley & Sons, Inc.All rights reserved. Reproduction or translation of this
work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.
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