Investments, Binder Ready Version: Analysis and Management, 13th Edition Solution Manual

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1Chapter 1: Understanding InvestmentsCHAPTER OVERVIEWChapter 1 is designed to be a standard introductory chapter. As such, its purpose is tointroduce students to the subject ofinvestments, explain whatinvestments is concerned withfrom a summary viewpoint, and outline what the remainder of the text will cover. It definesimportant terms such asinvestments, security analysis, portfolio management, expected andrealized rate of return, risk-free rate of return, risk, and risk tolerance.IT IS IMPORTANT TO NOTEthatChapter 1 discusses some important issues, such asthe expected return-risk tradeoff that governs the investment process, the uncertainty thatdominates investment decisions, the globalization of investments,andthe impact of institutionalinvestors. As such, the chapter sets the tone for the entire text and explains to the reader whatinvestments is all about. It establishes a basic framework for the course without going into toomuch detail at the outset.Chapter 1 also contains some material that will be of direct interest to students, includingthe importance of studying investments (using illustrations of the wealth that can be accumulatedby compounding over long periods of time) and investments as a profession. The CFAdesignation isalso brieflydiscussed.Equally important, Chapter 1 doesnotcover calculations and statistical concepts, data onasset returns, and so forth. The authorsfeel strongly that Chapter 1 is not the place to do thiswhen most students have little knowledge of what the subject is all about. They are not ready forthis type of important material, and since it will not be used immediately,they will lose sight ofwhy it was introduced. The authorsbelieve that it is much more effective to introduce thestudentsthoroughlyto what the subject involves.It is highly desirable for instructors to add their own viewpoints at the outset of thecourse,perhaps using recent stories from the popular press to emphasize what investments isconcerned with, why students should be interested in the subject, and so forth.One interestingand important topic that can be discussed in class is investment fraud. Scams continue day afterday, and many people lose their life savings. Most people will haveat leastheard of the Ponzischeme revealed in late 2008 involvingBernie Madoff. By learning a few basic investingprinciples, students will be able to avoid these “scams,” thereby possibly saving themselves ortheir family and friends from misfortune.Chapter 1 also discusses ethics in investing, setting the stage for examples of ethicalissues in other chapters.

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