Instructor Manual: Troy Adair/John Nofsinger, Foundations of Investments 2e, 9798214056944, © 2027; Chapter 1: Introduction to Investments
Instructor Manual
Troy Adair/John Nofsinger, Foundations of Investments 2e, 9798214056944,
© 2027; Chapter 1: Introduction to Investments
TABLE OF CONTENTS
Purpose and Perspective of the Chapter......................................................................2
Chapter Objectives........................................................................................................2
Chapter Outline.............................................................................................................2
Additional Resources..................................................................................................17
List of Formulas.......................................................................................................................................17
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 1
accessible website, in whole or in part.
, Instructor Manual: Troy Adair/John Nofsinger, Foundations of Investments 2e, 9798214056944, © 2027; Chapter 1: Introduction to Investments
PURPOSE AND PERSPECTIVE OF THE CHAPTER
The purpose of this chapter is to introduce the concepts that will be developed throughout the text. These
are important foundational financial concepts that apply to investing, including capital flow, types of
financial assets, risk and expected return, asset valuation, risk aversion, asset allocation, diversification,
and market efficiency. Each of these themes reappears throughout the text. Even though a chapter might
be devoted to a specific topic, such as mutual funds or bonds, these specific assets ultimately must fit into
a portfolio. It is important to know the characteristics—like risks and expected return—of a specific
security. But ultimately, the characteristics of each individual asset will interact with the other assets in
your portfolio. In addition, the success of your portfolio will depend on the macroeconomic environment.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
LO 1-1 Describe the difference between real assets and financial assets.
LO 1-2 Explain the system of cash flows between companies, investors, and the government.
LO 1-3 Understand the factors involved in assessing value.
LO 1-4 Describe the characteristics of an efficient market.
LO 1-5 Recognize how asset-specific risk and asset allocation contribute to portfolio
diversification.
LO 1-6 Explain the importance of integrating the macroeconomic environment into the investing
process.
LO 1-7 Describe careers in the investment service sector.
CHAPTER OUTLINE
The following outline organizes activities (including any existing discussion questions in PowerPoints or
other supplements) and assessments by chapter (and therefore by topic), so you can see how all the
content relates to the topics covered in the text.
I. Investments
I. Investments (LO 1-1, PPT Slide 7)
a. The term investments can be used in a variety of ways and often depends on the
context. In this text, investment means “the purchase of an asset for the
purpose of storing and (possibly) increasing value over time.”
b. Investment will then include the transfer of ownership as well as storing value.
c. In this text, investments do not include more philosophical investments, such as
investing in one’s health through exercise.
d. Examples of investments include the purchase of stock, bonds, options,
commodity contracts, cryptocurrency, antiques, stamps, and real estate.
Investments also include a company’s purchase of equipment or buildings to
create valuable products in the future.
e. Many individuals have investments through their retirement plan, often a
401(k) plan. These plans are named for the section of the Internal Revenue
Code that defines them. Individuals set money aside in these plans with the
intention of only withdrawing those funds in retirement. The benefits of these
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 2
accessible website, in whole or in part.
, Instructor Manual: Troy Adair/John Nofsinger, Foundations of Investments 2e, 9798214056944, © 2027; Chapter 1: Introduction to Investments
plans include (1) interest on the money you have invested in the plan, (2) the
right to any company-matching contributions and the growth on those funds,
and (3) the potential ability to take the money out in the future and taxed at a
(potentially) lower tax rate.
f. Within a retirement plan or with any other investment, the study of investments
includes determining which investments to purchase, how much to purchase of
each, when to buy and sell, and how investments interact with each other.
g. Valuation is the process of determining the current worth of an asset.
h. Valuation is the present value of all the future benefits. Future benefits are
usually considered the future cash flows from the investment.
i. Another important element in investing is the economic environment.
Certainly, some economic situations are better for some companies than others.
The overall economy impacts all companies in some way.
j. Finally, a key element in investing is the role of a diversified portfolio.
Specifically, a diversified portfolio is the correlation of one investment’s cash
flow with another investment’s cash flow. Investors tend to hold several
different investments at the same time. The collection of those investments is
called their portfolio. When the cash flows of the various investments occur at
different times and in different amounts, then the portfolio is called a
diversified portfolio.
To have a diversified portfolio, the investments need to have low correlation
with each other. Correlation refers to the degree to which the returns of two
assets move together.
Discussion Activity (20 minutes, PPT 15)
I.
Considering your industry or field of interest, what are two companies’
stocks that would be highly correlated? What are two companies’ stocks
that would not be highly correlated? Why might there be a difference?
II. Debrief: Stocks are more likely to be highly correlated the more similar
the two companies are. If there are differences in the companies, then the
stocks are likely to have a low correlation. Uncertainty is always a
consideration.
II. Outline of the textbook (PPT Slide 12)
a. There are six parts to this textbook. The general outline is:
I. Part I: investment basics and environment
II. Part II: measurement and valuation tools
III. Part III: valuation of preferred and common stock
IV. Part IV: valuation of debt securities, bonds
V. Part V: valuation of derivative securities
VI. Part VI: specialized topics
III. Real assets and financial assets (LO 1-1, PPT Slide 16)
a. Real assets are physical assets that have value due to their substance and properties.
I. Examples of those with value due to substance would be gold, silver,
commodities, real estate, and equipment. Examples of those with value due to
properties would be patents, trademarks, and other intellectual property.
II. Real assets produce economic output. For example, if you purchase a machine,
you expect to use it to create product that can then be sold.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 3
accessible website, in whole or in part.
, Instructor Manual: Troy Adair/John Nofsinger, Foundations of Investments 2e, 9798214056944, © 2027; Chapter 1: Introduction to Investments
III.
Real assets can be unique. There is only one plot of land at that specific
location.
b. Financial assets are instruments issued by corporations, governments, or other
organizations that offer cash flow. These are called securities.
I. Examples include stocks, bonds, loans made, receivables, derivative securities,
and cryptocurrencies.
II. Financial assets determine how to allocate the output that is produced. If you
purchase a share of stock, then you are giving resources to the company. By
owning the share of stock, you have rights to any dividends paid by the
company, which would be resources from the company.
III. Financial assets are rarely unique. All the shares of a company are the same.
IV. The focus of investing is on buying the financial assets, as opposed to
corporate finance, which focuses on selling the financial assets.
IV. Cash flows in the economy (LO 1-2, PPT Slide 25)
a. One could view the economy as cash flows to and from different sectors. The sectors
could be investors, corporations, and the government.
I. Investors receive cash from companies in terms of dividends and interest.
Investors provide cash to companies through the purchase of securities.
Investors also provide cash to government through taxes.
II. Companies use resources to invest in projects/products. These are sold, leading
to profits. The profits are used in three ways. First, profits can be reinvested in
the company. Second, they can be paid out as dividends and interest to
investors. Finally, profits are used to pay the company’s taxes to the
government.
III. Governments receive cash from investors and from companies’ profits.
IV. The graphic below shows these cash flows.
V. How and when to raise money influences how cash will flow from the investor
to the company.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 4
accessible website, in whole or in part.
Instructor Manual
Troy Adair/John Nofsinger, Foundations of Investments 2e, 9798214056944,
© 2027; Chapter 1: Introduction to Investments
TABLE OF CONTENTS
Purpose and Perspective of the Chapter......................................................................2
Chapter Objectives........................................................................................................2
Chapter Outline.............................................................................................................2
Additional Resources..................................................................................................17
List of Formulas.......................................................................................................................................17
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 1
accessible website, in whole or in part.
, Instructor Manual: Troy Adair/John Nofsinger, Foundations of Investments 2e, 9798214056944, © 2027; Chapter 1: Introduction to Investments
PURPOSE AND PERSPECTIVE OF THE CHAPTER
The purpose of this chapter is to introduce the concepts that will be developed throughout the text. These
are important foundational financial concepts that apply to investing, including capital flow, types of
financial assets, risk and expected return, asset valuation, risk aversion, asset allocation, diversification,
and market efficiency. Each of these themes reappears throughout the text. Even though a chapter might
be devoted to a specific topic, such as mutual funds or bonds, these specific assets ultimately must fit into
a portfolio. It is important to know the characteristics—like risks and expected return—of a specific
security. But ultimately, the characteristics of each individual asset will interact with the other assets in
your portfolio. In addition, the success of your portfolio will depend on the macroeconomic environment.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
LO 1-1 Describe the difference between real assets and financial assets.
LO 1-2 Explain the system of cash flows between companies, investors, and the government.
LO 1-3 Understand the factors involved in assessing value.
LO 1-4 Describe the characteristics of an efficient market.
LO 1-5 Recognize how asset-specific risk and asset allocation contribute to portfolio
diversification.
LO 1-6 Explain the importance of integrating the macroeconomic environment into the investing
process.
LO 1-7 Describe careers in the investment service sector.
CHAPTER OUTLINE
The following outline organizes activities (including any existing discussion questions in PowerPoints or
other supplements) and assessments by chapter (and therefore by topic), so you can see how all the
content relates to the topics covered in the text.
I. Investments
I. Investments (LO 1-1, PPT Slide 7)
a. The term investments can be used in a variety of ways and often depends on the
context. In this text, investment means “the purchase of an asset for the
purpose of storing and (possibly) increasing value over time.”
b. Investment will then include the transfer of ownership as well as storing value.
c. In this text, investments do not include more philosophical investments, such as
investing in one’s health through exercise.
d. Examples of investments include the purchase of stock, bonds, options,
commodity contracts, cryptocurrency, antiques, stamps, and real estate.
Investments also include a company’s purchase of equipment or buildings to
create valuable products in the future.
e. Many individuals have investments through their retirement plan, often a
401(k) plan. These plans are named for the section of the Internal Revenue
Code that defines them. Individuals set money aside in these plans with the
intention of only withdrawing those funds in retirement. The benefits of these
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 2
accessible website, in whole or in part.
, Instructor Manual: Troy Adair/John Nofsinger, Foundations of Investments 2e, 9798214056944, © 2027; Chapter 1: Introduction to Investments
plans include (1) interest on the money you have invested in the plan, (2) the
right to any company-matching contributions and the growth on those funds,
and (3) the potential ability to take the money out in the future and taxed at a
(potentially) lower tax rate.
f. Within a retirement plan or with any other investment, the study of investments
includes determining which investments to purchase, how much to purchase of
each, when to buy and sell, and how investments interact with each other.
g. Valuation is the process of determining the current worth of an asset.
h. Valuation is the present value of all the future benefits. Future benefits are
usually considered the future cash flows from the investment.
i. Another important element in investing is the economic environment.
Certainly, some economic situations are better for some companies than others.
The overall economy impacts all companies in some way.
j. Finally, a key element in investing is the role of a diversified portfolio.
Specifically, a diversified portfolio is the correlation of one investment’s cash
flow with another investment’s cash flow. Investors tend to hold several
different investments at the same time. The collection of those investments is
called their portfolio. When the cash flows of the various investments occur at
different times and in different amounts, then the portfolio is called a
diversified portfolio.
To have a diversified portfolio, the investments need to have low correlation
with each other. Correlation refers to the degree to which the returns of two
assets move together.
Discussion Activity (20 minutes, PPT 15)
I.
Considering your industry or field of interest, what are two companies’
stocks that would be highly correlated? What are two companies’ stocks
that would not be highly correlated? Why might there be a difference?
II. Debrief: Stocks are more likely to be highly correlated the more similar
the two companies are. If there are differences in the companies, then the
stocks are likely to have a low correlation. Uncertainty is always a
consideration.
II. Outline of the textbook (PPT Slide 12)
a. There are six parts to this textbook. The general outline is:
I. Part I: investment basics and environment
II. Part II: measurement and valuation tools
III. Part III: valuation of preferred and common stock
IV. Part IV: valuation of debt securities, bonds
V. Part V: valuation of derivative securities
VI. Part VI: specialized topics
III. Real assets and financial assets (LO 1-1, PPT Slide 16)
a. Real assets are physical assets that have value due to their substance and properties.
I. Examples of those with value due to substance would be gold, silver,
commodities, real estate, and equipment. Examples of those with value due to
properties would be patents, trademarks, and other intellectual property.
II. Real assets produce economic output. For example, if you purchase a machine,
you expect to use it to create product that can then be sold.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 3
accessible website, in whole or in part.
, Instructor Manual: Troy Adair/John Nofsinger, Foundations of Investments 2e, 9798214056944, © 2027; Chapter 1: Introduction to Investments
III.
Real assets can be unique. There is only one plot of land at that specific
location.
b. Financial assets are instruments issued by corporations, governments, or other
organizations that offer cash flow. These are called securities.
I. Examples include stocks, bonds, loans made, receivables, derivative securities,
and cryptocurrencies.
II. Financial assets determine how to allocate the output that is produced. If you
purchase a share of stock, then you are giving resources to the company. By
owning the share of stock, you have rights to any dividends paid by the
company, which would be resources from the company.
III. Financial assets are rarely unique. All the shares of a company are the same.
IV. The focus of investing is on buying the financial assets, as opposed to
corporate finance, which focuses on selling the financial assets.
IV. Cash flows in the economy (LO 1-2, PPT Slide 25)
a. One could view the economy as cash flows to and from different sectors. The sectors
could be investors, corporations, and the government.
I. Investors receive cash from companies in terms of dividends and interest.
Investors provide cash to companies through the purchase of securities.
Investors also provide cash to government through taxes.
II. Companies use resources to invest in projects/products. These are sold, leading
to profits. The profits are used in three ways. First, profits can be reinvested in
the company. Second, they can be paid out as dividends and interest to
investors. Finally, profits are used to pay the company’s taxes to the
government.
III. Governments receive cash from investors and from companies’ profits.
IV. The graphic below shows these cash flows.
V. How and when to raise money influences how cash will flow from the investor
to the company.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 4
accessible website, in whole or in part.
