CHAPTER OVERVIEW - CHAPTER OVERVIEW Chapter 1 is designed to be a ...

Chapter 1: Understanding Investments

CHAPTER OVERVIEW

Chapter 1 is designed to be a standard introductory chapter. As such, its purpose is to introduce students to the subject of investments, explain what investments is concerned with from a summary viewpoint, and outline what the remainder of the text will cover. It defines important terms such as investments, security analysis, portfolio management, expected and realized return, risk-free return, risk, and risk tolerance.IT IS IMPORTANT TO NOTE that Chapter 1 discusses some important issues, such as the risk-expected return tradeoff that governs the investment process, the uncertainty that dominates investment decisions, the globalization of investments, and the impact of institutional investors. As such, the chapter sets the tone for the entire text and explains to the reader what investments encompasses. It establishes a basic framework for the course without going into too much detail at the outset.Chapter 1 also contains some material that will be of direct interest to students, including the importance of studying investments (using illustrations of the wealth that can be accumulated by compounding over long periods of time) and investments as a profession. The CFA designation is also briefly discussed.Equally important, Chapter 1 does not cover calculations and statistical concepts, data on asset returns, and so forth. The authors feel strongly that Chapter 1 is not the place to do this when most students have little knowledge of what the subject is all about. They are not ready for this type of important material, and since it will not be used immediately, they will lose sight of why it was introduced. The authors believe that it is much more effective to introduce the students thoroughly to what the subject involves.It is highly desirable for instructors to add their own viewpoints at the outset of the course, perhaps using recent stories from the popular press to emphasize what investments involves, why students should be interested in the subject, and so forth. Two interesting topics included in the chapter that could be the basis of interesting class discussions are cryptocurrencies and investment fraud. The attractiveness of cryptocurrency (e.g. bitcoin) as an investment is a very popular and debated topic. Likewise, investment scams continue day after day, and many people lose their life savings. Most people will have at least heard of the Ponzi scheme revealed in late 2008 involving Bernie Madoff. By learning a few basic investing principles, students will be able to avoid these “scams,” thereby possibly saving themselves or their family and friends from misfortune.Chapter 1 also discusses ethics in investing, setting the stage for examples of ethical issues in other chapters.Investments Analysis and Management 14e Charles P Jones (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) 1 / 4

CHAPTER OBJECTIVES

To introduce students to the subject matter of investments from an overall viewpoint, including terminology.To explain the basic nature of the investing decision as a tradeoff between risk and expected return.To explain that the decision process consists of security analysis and portfolio management and that external factors affect this decision process. These factors include uncertainty, the necessity to think of investments in a global context, the environment involving institutional investors, and the impact of the internet on investing.To organize the remainder of the text. 2 / 4

MAJOR CHAPTER HEADINGS [Contents] An Overall Perspective on Investing Just Say NO!Establishing a Framework for Investing Some Definitions [investment; investments; financial and real assets; marketable securities; portfolio] A Perspective on Investing [investing is only one part of overall financial decisions; take a portfolio perspective] Why Do We Invest?[to increase monetary wealth; is bitcoin an investment?] Take a Portfolio Perspective The Importance of Studying Investments The Personal Aspects [most people make investment decisions; examples of wealth accumulation from compounding; most people will be responsible for making investment decisions for retirement; understanding investments helps students when reading the popular press] Investments as a Profession [various jobs such as security analysts, portfolio managers, stockbrokers, and financial advisors; financial planners; CFA designation] Understanding the Investment Decision Process The Basis of Investment Decisions—Return and Risk [expected return vs. realized return; risk; risk-averse investor; risk tolerance; the risk-expected return tradeoff; diagram of tradeoff; ex post vs. ex ante; risk-free return, RF] Structuring the Decision Process

[a two-step process: security analysis and portfolio management]

Important Considerations in the Investment Decision Process The Great Unknown [uncertainty dominates decisions--the future is unknown!] 3 / 4

A Global Perspective [the importance of foreign markets; the euro; emerging markets] The Importance of the Internet [using the internet to invest] Individual Investors vs. Institutional Investors [individual investors compete with institutional investors, but individuals are the beneficiaries of institutional investor activity; Regulation FD; spin-offs] Ethics in Investing Organizing the Text [Background; Realized and Expected Returns and Risk; Bonds; Stocks; Security Analysis, Fundamental and Technical Analysis; Derivative Securities; Portfolio and Capital Market Theory; the Portfolio Management Process and Measuring Portfolio Performance]

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