Basic investment decisions

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

•        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?