1. INVESTMENTS: Analysis and Management Third Canadian Edition
W. Sean Cleary
Charles P. Jones
Prepared by
Khalil Torabzadeh
University of Lethbridge

2. Understanding Investments
Chapter 1
Understanding Investments

3. Learning Objectives
Define investment and discuss what it means to study investments.
Explain why risk and return are the two critical components of all investing decisions.
Outline the two-step investment decision process.
Discuss key factors that affect the investment decision process.
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

4. Investments Defined
Investments is the study of the process of committing funds to one or more assets.
Emphasis is on holding marketable securities.
Concepts apply to financial assets and real assets within domestic as well as international markets.
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

5. Investment Objectives
Primary Objectives
Safety of principal
Income
Growth of capital
Secondary Objectives
Liquidity
Tax minimization
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

6. Investment Constraints
Possible constraints for investors include:
Legal
Moral/ethical
Emotional – including investment knowledge and risk tolerance
Basic minimum income to be provided by the portfolio
Realism – an understanding that some objectives are unrealistic (e.g., high returns with low risk)
Other (e.g., illness, pending divorce, etc.)
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

7. Primary and Secondary Objectives
Objectives and constraints must be related to the three primary investment objectives of safety, income, and growth, and to the secondary objectives of liquidity and tax minimization.
The importance of safety relates to: risk, market timing, inflation, return, and emotion
The importance of income relates to: taxation, return, risk, inflation, and basic minimum income
The importance of growth relates to: taxation, risk, return, market timing, and emotional considerations
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

8. Why Study Investments?
Most individuals make investment decisions sometime
Individuals need sound framework for managing and increasing wealth
Essential part of a career in the field
Security analyst, portfolio manager, investment advisor, financial planner, Chartered Financial Analyst
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

9. Investment Decisions
Underlying investment decisions: the tradeoff between expected return and risk
Return: expected return is not usually the same as realized return
Risk: the possibility that the realized return will be different than the expected return
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

10. The Tradeoff Between ER and Risk
Any level of expected return and risk can be attained
The expected return (ER) must be large enough to compensate for taking additional risk
Stocks ER
Bonds
Risk-free Rate
Risk
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

11. “Typical” Chart
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

12. The Investment Decision Process
Two-step process:
Security analysis
Necessary to understand security characteristics and applied to these securities to estimate their price or value
Portfolio management
Selected securities viewed as a single unit
How and when should it be revised?
How should portfolio performance be measured?
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

13. 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 and/or reduce risk
Investors must now cope with a changed investing environment
Internet changes investments environment
Institutional investors are important
How efficient are financial markets in processing new information?
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

14. Corporate Governance Main issues:
The accountability of the Board of Directors and Management
A re-examination of accounting and auditing practices
Management compensation arrangements such as executive stock option plans
Disclosure requirements
The effectiveness of existing regulatory bodies
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

15. Appendix 1A: The Chartered Financial Analyst® (CFA®) Program
Individuals who are interested in the investment area should consider seeking a CFA ® designation
The CFA institute administers the Chartered Financial Analyst ® curriculum and examination program
Level I emphasizes tools and inputs
Level II emphasizes asset valuation
Level III emphasizes portfolio management
For more information:
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

16. Appendix 1B: The Canadian Securities Institute (CSI)
The CSI offers the Canadian Securities Course (CSC), which is a mandatory requirement for individuals who wish to become licensed to sell financial securities in Canada and to register to sell mutual funds
Cleary Jones/Investments: Analysis and Management, 3rd Canadian Edition, Chapter 1

17. Copyright
Copyright © 2009 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.