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
Investments & Financial Assets
Essential nature of investment
• Reduced current consumption
• Planned later consumption
Real Assets
• Assets used to produce goods and services (including land, buildings, machinery, and knowledge used to produce goods & services
Financial Assets
• Claims on real assets or income generated from them (including stocks & bonds)
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
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
• The Tradeoff b/w
ER and Risk
ER and Risk
• Investors manage risk at a cost - lower expected returns (ER)
• Any level of expected return and risk can be attained
• 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 and when should it be revised?
– How should portfolio performance be measured?
