Understanding Investments & Investment Decisions

Understanding Investments & Investment Decisions

Defining Investment

•      “An investment is the commitment of funds to one or more assets that will be held over some future time period.” or

•      “An investment is the current commitment of fund for a period of time in order to derive future payments that will compensate the investor for (1) the time the funds are committed, (2) the expected rate of inflation and (3) the uncertainty of the future payments.”

Investment in Assets

•      Funds are invested in Financial Assets and Real Assets.

•      Financial assets include Debt & Equity Securities

•      Some of those financial assets are treated as Marketable Securities.

•      Investors some time hold Portfolio.

•      Investments are made to maximize current & future wealth and also to manage wealth effectively.

Reasons Behind Investment

•      To maximize current & future wealth

•      To enhance future consumption opportunities

•      To manage wealth effectively by generating most from the investment and protecting it from changes in macro-economic factors

Return of Investment

•      Expected Return: Ex-Ante or anticipated return

•      Realized Return: Ex-Post or actual return

•      Expected Return vs. Realized Return

Risk of Investment

•      Define Risk

•      Investors behavior in terms of risk –

– Risk Takers

– Risk Averse

– Risk Indifferent

•      Risk free rate of return

Risk-Return Trade-Off

•      Investment decision depends on Risk & Return

•      The risk & return trade-off always slopes upward.

•      Figure 1-1 (page 10)

Investment on Individual Security

•      Security Analysis – Valuation and Analysis of debt and equity securities.

•      Valuation of securities depends on company, industry, economy and also on risk and return.

•       Market Value vs. Estimated Economic Value

•      This relationship will indicate investment decision and market efficiency.

Investment on Portfolios

•      Passive Investment Strategy

“A strategy that determines initial investment proportions and assets and makes few changes over time.”

•      Active Investment Strategy

“It involves specific decisions to change the investment proportions chosen and/or assets in the belief that profit can be made.”

Market efficiency is very important factor for Active Investment Strategy


•      Individual Investors

•      Institutional or Corporate Investors

•      Impact on Market Efficiency

Factors Affecting Investment Decision

•      Return on investment

•      Risk or uncertainty in investment

•      Type of investors

•      Economic conditions

•      Global nature of investing

•      New Economy vs. Old Economy Stocks

•      Technology-The rise of internet