Solutions for Investments: Analysis and Management, 15th Edition by Jensen
Chapter 1: Understanding Investments
CHAPTER OVERVIEW
Chapter 1 is a standard introductory chapter. As such, it introduces students to the subject
of investments and outlines what the remainder of the text will cover. It defines important terms
such as investments, security analysis, portfolio management, expected and realized return,
risk-free return, risk, Fintech, and risk tolerance.
Note that Chapter 1 discusses some important issues, such as the risk-expected return
tradeoff, the uncertainty that dominates investment decisions, the globalization of investments,
and the impact of institutional investors. As such, the chapter sets the tone for the entire text and
explains what investments encompasses. It establishes a 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, the effects of compounding on wealth accumulation, and
the wide variety of opportunities available to make investments a profession. The CFA
designation is also briefly discussed.
Equally important, Chapter 1 does not present any calculations or statistical concepts.
The authors believe that Chapter 1 is not the place for this material since students have little
knowledge of what the subject is all about. They are not ready for this type of important material,
and since it will not be used immediately, they will lose sight of why it was introduced. In
Chapter 1, the authors believe that it is much more effective to thoroughly cover what the subject
involves.
Instructors should add their own viewpoints at the outset of the course, perhaps using
recent financial developments to motivate why students should be interested in investments.
Three interesting topics included in the chapter that could be the basis of interesting class
discussions are cryptocurrencies, the use of AI in investment management, and investment fraud.
The attractiveness of cryptocurrency (e.g. bitcoin) as an investment is a very popular and debated
topic. Likewise, investment scams continue day after day, and many people lose their life
savings. Some students may be familiar with the collapse of cryptocurrency firm FTX and the
loss incurred by investors, including some celebrities such as Tom Brady. Instructors should
highlight that by learning a few basic investing principles, students will be able to avoid
investment “scams.”
Chapter 1 also discusses ethics in investing, setting the stage for examples of ethical
issues in other chapters.
,CHAPTER OBJECTIVES
To introduce students to investments from an overall viewpoint, including investments
terminology.
To explain the nature of the investing decision as a tradeoff between risk and expected
return.
To explain that the investing process consists of security analysis and portfolio
management, which are impacted by external factors. These factors include uncertainty,
global economic developments, regulation, institutional considerations, and
technological advances.
To motivate and structure the remainder of the text.
,MAJOR CHAPTER HEADINGS [Contents]
An Overall Perspective on Investing
Just Say NO!
Establishing a Framework for Investing
Some Definitions
[investment; investments; financial and real assets;
marketable securities; portfolio]
A Perspective on Investing
[investing to improve one’s welfare]
Why Do We Invest?
[to increase monetary wealth; is bitcoin an investment?]
Take a Portfolio Perspective
The Importance of Studying Investments
The Personal Aspects
[most people make investment decisions e.g., retirement savings; examples of wealth
accumulation from compounding; understanding investments helps students interpret
popular press statements]
Investments as a Profession
[various jobs such as security analysts, portfolio managers, stockbrokers, investment
bankers, financial advisors, financial planners; CFA designation; Fintech; AI in
financial advising]
Understanding the Investment Process
The Basis of Investment Decisions—Return and Risk
[expected return vs. realized return; risk; risk-averse investor; risk tolerance; the
risk-expected return tradeoff; diagram of tradeoff; ex post vs. ex ante; risk-free
return, RF]
Structuring the Decision Process
[a two-step process: security analysis and portfolio management]
Important Considerations in Investing
The Great Unknown
, [uncertainty dominates decisions--the future is unknown!]
A Global Perspective
[the importance of foreign markets; emerging markets; global firms; investing
globally]
The Importance of the Internet
[using the internet to invest]
Individual Investors vs. Institutional Investors
[individual investors compete with institutional investors, but individuals benefit from
institutional investor activity; Regulation FD; spin-offs]
Ethics in Investing
[Luckin Coffee, Martha Stewart]
Organizing the Text
[Background; Realized and Expected Returns and Risk; Portfolio Theory and Asset
Pricing; Stock Valuation and Management; Security Analysis; Fundamental and
Technical Analysis; Bonds; Derivative Securities; the Portfolio Management Process and
Measuring Portfolio Performance]
Chapter 1: Understanding Investments
CHAPTER OVERVIEW
Chapter 1 is a standard introductory chapter. As such, it introduces students to the subject
of investments and outlines what the remainder of the text will cover. It defines important terms
such as investments, security analysis, portfolio management, expected and realized return,
risk-free return, risk, Fintech, and risk tolerance.
Note that Chapter 1 discusses some important issues, such as the risk-expected return
tradeoff, the uncertainty that dominates investment decisions, the globalization of investments,
and the impact of institutional investors. As such, the chapter sets the tone for the entire text and
explains what investments encompasses. It establishes a 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, the effects of compounding on wealth accumulation, and
the wide variety of opportunities available to make investments a profession. The CFA
designation is also briefly discussed.
Equally important, Chapter 1 does not present any calculations or statistical concepts.
The authors believe that Chapter 1 is not the place for this material since students have little
knowledge of what the subject is all about. They are not ready for this type of important material,
and since it will not be used immediately, they will lose sight of why it was introduced. In
Chapter 1, the authors believe that it is much more effective to thoroughly cover what the subject
involves.
Instructors should add their own viewpoints at the outset of the course, perhaps using
recent financial developments to motivate why students should be interested in investments.
Three interesting topics included in the chapter that could be the basis of interesting class
discussions are cryptocurrencies, the use of AI in investment management, and investment fraud.
The attractiveness of cryptocurrency (e.g. bitcoin) as an investment is a very popular and debated
topic. Likewise, investment scams continue day after day, and many people lose their life
savings. Some students may be familiar with the collapse of cryptocurrency firm FTX and the
loss incurred by investors, including some celebrities such as Tom Brady. Instructors should
highlight that by learning a few basic investing principles, students will be able to avoid
investment “scams.”
Chapter 1 also discusses ethics in investing, setting the stage for examples of ethical
issues in other chapters.
,CHAPTER OBJECTIVES
To introduce students to investments from an overall viewpoint, including investments
terminology.
To explain the nature of the investing decision as a tradeoff between risk and expected
return.
To explain that the investing process consists of security analysis and portfolio
management, which are impacted by external factors. These factors include uncertainty,
global economic developments, regulation, institutional considerations, and
technological advances.
To motivate and structure the remainder of the text.
,MAJOR CHAPTER HEADINGS [Contents]
An Overall Perspective on Investing
Just Say NO!
Establishing a Framework for Investing
Some Definitions
[investment; investments; financial and real assets;
marketable securities; portfolio]
A Perspective on Investing
[investing to improve one’s welfare]
Why Do We Invest?
[to increase monetary wealth; is bitcoin an investment?]
Take a Portfolio Perspective
The Importance of Studying Investments
The Personal Aspects
[most people make investment decisions e.g., retirement savings; examples of wealth
accumulation from compounding; understanding investments helps students interpret
popular press statements]
Investments as a Profession
[various jobs such as security analysts, portfolio managers, stockbrokers, investment
bankers, financial advisors, financial planners; CFA designation; Fintech; AI in
financial advising]
Understanding the Investment Process
The Basis of Investment Decisions—Return and Risk
[expected return vs. realized return; risk; risk-averse investor; risk tolerance; the
risk-expected return tradeoff; diagram of tradeoff; ex post vs. ex ante; risk-free
return, RF]
Structuring the Decision Process
[a two-step process: security analysis and portfolio management]
Important Considerations in Investing
The Great Unknown
, [uncertainty dominates decisions--the future is unknown!]
A Global Perspective
[the importance of foreign markets; emerging markets; global firms; investing
globally]
The Importance of the Internet
[using the internet to invest]
Individual Investors vs. Institutional Investors
[individual investors compete with institutional investors, but individuals benefit from
institutional investor activity; Regulation FD; spin-offs]
Ethics in Investing
[Luckin Coffee, Martha Stewart]
Organizing the Text
[Background; Realized and Expected Returns and Risk; Portfolio Theory and Asset
Pricing; Stock Valuation and Management; Security Analysis; Fundamental and
Technical Analysis; Bonds; Derivative Securities; the Portfolio Management Process and
Measuring Portfolio Performance]
