Complete Solution Manual for Investments Analysis and Management, 14th Edition by
Charles P. Jones, Gerald R. Jensen Chapter 1-22
PART ONE: BACKGROUND
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 this topic 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
rate of return, risk-free rate of return, and risk.
IT IS IMPORTANT TO NOTE THAT Chapter 1 discusses some
important issues, such as the expected return--risk tradeoff that
governs the investment process, the uncertainty that dominates
investment decisions, the globalization of investments, the
impact of institutional investors, and the basic idea behind the
Efficient Market Hypothesis. As such, the chapter is important
in setting the tone for the entire text and in explaining to the
reader what Investments is all about. 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 discussed,
and the Appendix contains a more detailed description of the CFA
program.
Equally important, Chapter 1 does not cover calculations and
statistical concepts, data on asset returns, and so forth, either
in the chapter or an appendix. The author feels strongly that
Chapter 1 is not the place to do this when students in most cases
have no real idea what the subject is all about. They are not
1
,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 author believes that it is much more effective
to introduce the students thoroughly to what the subject involves
without getting into technical details at the very beginning of
the course.
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 is
concerned with, why students should be interested in the subject,
and so forth.
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 expected return and risk.
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.
MAJOR CHAPTER HEADINGS [Contents]
The Nature of Investments
Some Definitions
[investment; investments; financial and real assets;
marketable securities; portfolio]
A Perspective on Investing in Financial Assets
[investing is only one part of overall financial decisions]
Why Do We Invest?
[to increase monetary wealth]
2
,The Importance of Studying Investments
The Personal Aspects
[most people make some type of investment decisions;
examples of wealth accumulation as a result of compounding;
how an understanding of the subject will help students when
reading the popular press]
Investments as a Profession
[various jobs, salary ranges; Chartered Financial Analyst
designation]
Understanding the Investment Decision Process
The Basis of Investment Decisions
[expected return; realized return; risk; risk-averse
investor; the Expected-Return--Risk Tradeoff; diagram of
tradeoff; ex post vs. ex ante; risk-free rate of return, RF]
3
, Structuring the Decision Process
[a two-step process: security analysis and portfolio
management; passive and active investment strategies;
the Efficient Market Hypothesis]
Important Considerations in the Investment Decision Process
for Today’s Investors
The Great Unknown
[uncertainty dominates decisions--the future is
unknown!]
The Global Investments Arena
[the importance of foreign markets; the Euro;
emerging markets]
The New Economy vs. The Old Economy
[old economy stocks are the traditional service,
consumer and financial companies; new economy
stocks have a focus on technology, e-commerce,
etc. In most cases the latter have little or no
earnings, and certainly don’t pay dividends in
virtually all cases]
The Rise of the Internet
[using the internet to invest; the impact of the
sharp market decline in 2000-2001]
Institutional Investors
[individual investors compete with institutional
investors, but individuals are the beneficiaries of
institutional investor activity, such as pension funds;
the issue of market efficiency]
Organizing the Text
[Background; Realized and Expected Returns and Risk;
Bonds; Stocks; Security Analysis, including both
fundamental and technical analysis; Derivative
Securities; Portfolio Theory and Capital Market Theory;
the Portfolio Management Process and Measuring
Portfolio Performance]
4
Charles P. Jones, Gerald R. Jensen Chapter 1-22
PART ONE: BACKGROUND
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 this topic 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
rate of return, risk-free rate of return, and risk.
IT IS IMPORTANT TO NOTE THAT Chapter 1 discusses some
important issues, such as the expected return--risk tradeoff that
governs the investment process, the uncertainty that dominates
investment decisions, the globalization of investments, the
impact of institutional investors, and the basic idea behind the
Efficient Market Hypothesis. As such, the chapter is important
in setting the tone for the entire text and in explaining to the
reader what Investments is all about. 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 discussed,
and the Appendix contains a more detailed description of the CFA
program.
Equally important, Chapter 1 does not cover calculations and
statistical concepts, data on asset returns, and so forth, either
in the chapter or an appendix. The author feels strongly that
Chapter 1 is not the place to do this when students in most cases
have no real idea what the subject is all about. They are not
1
,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 author believes that it is much more effective
to introduce the students thoroughly to what the subject involves
without getting into technical details at the very beginning of
the course.
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 is
concerned with, why students should be interested in the subject,
and so forth.
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 expected return and risk.
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.
MAJOR CHAPTER HEADINGS [Contents]
The Nature of Investments
Some Definitions
[investment; investments; financial and real assets;
marketable securities; portfolio]
A Perspective on Investing in Financial Assets
[investing is only one part of overall financial decisions]
Why Do We Invest?
[to increase monetary wealth]
2
,The Importance of Studying Investments
The Personal Aspects
[most people make some type of investment decisions;
examples of wealth accumulation as a result of compounding;
how an understanding of the subject will help students when
reading the popular press]
Investments as a Profession
[various jobs, salary ranges; Chartered Financial Analyst
designation]
Understanding the Investment Decision Process
The Basis of Investment Decisions
[expected return; realized return; risk; risk-averse
investor; the Expected-Return--Risk Tradeoff; diagram of
tradeoff; ex post vs. ex ante; risk-free rate of return, RF]
3
, Structuring the Decision Process
[a two-step process: security analysis and portfolio
management; passive and active investment strategies;
the Efficient Market Hypothesis]
Important Considerations in the Investment Decision Process
for Today’s Investors
The Great Unknown
[uncertainty dominates decisions--the future is
unknown!]
The Global Investments Arena
[the importance of foreign markets; the Euro;
emerging markets]
The New Economy vs. The Old Economy
[old economy stocks are the traditional service,
consumer and financial companies; new economy
stocks have a focus on technology, e-commerce,
etc. In most cases the latter have little or no
earnings, and certainly don’t pay dividends in
virtually all cases]
The Rise of the Internet
[using the internet to invest; the impact of the
sharp market decline in 2000-2001]
Institutional Investors
[individual investors compete with institutional
investors, but individuals are the beneficiaries of
institutional investor activity, such as pension funds;
the issue of market efficiency]
Organizing the Text
[Background; Realized and Expected Returns and Risk;
Bonds; Stocks; Security Analysis, including both
fundamental and technical analysis; Derivative
Securities; Portfolio Theory and Capital Market Theory;
the Portfolio Management Process and Measuring
Portfolio Performance]
4
