Investment Analysis and Portfolio Management
,
,Chapter I
Introduction to Investment Analysis
Aim
The aim of this chapter is to:
• introduce investment analysis
• explain the characteristics of investment
• explicate the need and importance of investments
Objectives
The objectives of this chapter are to:
• enlist the classification of investment on the basis of physical investments
• elucidate saving and investment
• explain investment activity
Learning outcome
At the end of this chapter, you will be able to:
• identify the direct and indirect investments
• understand the measures of return and risk
• recognise the determinants of required rate of return
1/JNU OLE
, Investment Analysis and Portfolio Management
1.1 Introduction
The term ‘investing’ could be associated with different activities, but the common target in these activities is to
‘employ’ the money (funds) during the time period seeking to enhance the investor’s wealth. Funds to be invested
come from assets already owned, borrowed money and savings. By foregoing consumption today and investing their
savings, investors expect to enhance their future consumption possibilities by increasing their wealth. However, it is
always useful to make a distinction between real and financial investments. Real investments usually involve some
kind of tangible assets, such as land, machinery, factories, etc. Financial investments involve contracts in paper or
electronic form, such as stocks, bonds, etc.
1.1.1 Definition of Investment
“Investment analysis is the study of financial securities for the purpose of successful investing.” This definition
contains the following important points:
• There are institutional facts about the financial securities, how to trade and what assets are to be traded.
• There are analytical issues involved in studying these securities, the calculation of risks and returns, and the
relationship between the two.
• There is the question of what success means for an investor, and the investment strategies that ensure that the
choices made are successful.
• There are financial theories that are necessary to try to understand how the markets work and how the prices
of assets are determined.
It is clear that the more an investor understands, the less likely they are to make an expensive mistake. Note carefully
that this is not saying that the more you know, the more you will earn. An explanation for this observation will be
found in some of the theories that follow. These comments partly address the question “Can you beat the market?”
Whether you can, depends on the view you may hold about the functioning of financial markets. One of the
interpretations of investment analysis is that this is just not possible on a repeated basis. An alternative interpretation
is that knowing the theory reveals where we should look for ways of beating the market.
1.2 Characteristics of Investment
Investment refers to investing money in financial physical assets and marketing assets. Major investment features
are risk, return, safety, liquidity, marketability, concealability, capital growth, purchasing power, stability and the
benefits.
Tax Benefits Safety
Stability of Income Concealability
Return Investment Capital Growth
Marketability Risk
Liquidity Purchasing Power Stability
Fig. 1.1 Characteristics of investment
(Source: Investment_Management_Chapter_1_Investment.pdf)
2/JNU OLE
,
,Chapter I
Introduction to Investment Analysis
Aim
The aim of this chapter is to:
• introduce investment analysis
• explain the characteristics of investment
• explicate the need and importance of investments
Objectives
The objectives of this chapter are to:
• enlist the classification of investment on the basis of physical investments
• elucidate saving and investment
• explain investment activity
Learning outcome
At the end of this chapter, you will be able to:
• identify the direct and indirect investments
• understand the measures of return and risk
• recognise the determinants of required rate of return
1/JNU OLE
, Investment Analysis and Portfolio Management
1.1 Introduction
The term ‘investing’ could be associated with different activities, but the common target in these activities is to
‘employ’ the money (funds) during the time period seeking to enhance the investor’s wealth. Funds to be invested
come from assets already owned, borrowed money and savings. By foregoing consumption today and investing their
savings, investors expect to enhance their future consumption possibilities by increasing their wealth. However, it is
always useful to make a distinction between real and financial investments. Real investments usually involve some
kind of tangible assets, such as land, machinery, factories, etc. Financial investments involve contracts in paper or
electronic form, such as stocks, bonds, etc.
1.1.1 Definition of Investment
“Investment analysis is the study of financial securities for the purpose of successful investing.” This definition
contains the following important points:
• There are institutional facts about the financial securities, how to trade and what assets are to be traded.
• There are analytical issues involved in studying these securities, the calculation of risks and returns, and the
relationship between the two.
• There is the question of what success means for an investor, and the investment strategies that ensure that the
choices made are successful.
• There are financial theories that are necessary to try to understand how the markets work and how the prices
of assets are determined.
It is clear that the more an investor understands, the less likely they are to make an expensive mistake. Note carefully
that this is not saying that the more you know, the more you will earn. An explanation for this observation will be
found in some of the theories that follow. These comments partly address the question “Can you beat the market?”
Whether you can, depends on the view you may hold about the functioning of financial markets. One of the
interpretations of investment analysis is that this is just not possible on a repeated basis. An alternative interpretation
is that knowing the theory reveals where we should look for ways of beating the market.
1.2 Characteristics of Investment
Investment refers to investing money in financial physical assets and marketing assets. Major investment features
are risk, return, safety, liquidity, marketability, concealability, capital growth, purchasing power, stability and the
benefits.
Tax Benefits Safety
Stability of Income Concealability
Return Investment Capital Growth
Marketability Risk
Liquidity Purchasing Power Stability
Fig. 1.1 Characteristics of investment
(Source: Investment_Management_Chapter_1_Investment.pdf)
2/JNU OLE
