Investments: Analysis and Management, 12th Edition

chapter 1

Understanding Investments

Suppose you are fortunate enough to receive an inheritance of $1 million from a relative. She specifies only that you must invest this money intelligently in financial assets within the next six months, and not spend it on consumption, and that you must be answerable to a trustee who has the final say if you fail to make reasonable decisions. You now face an enviable task—building a portfolio of stocks, bonds, and so forth—and you quickly realize that not only do you not know all the answers, you don't even know some of the questions.

Having had a finance course in college, you learned about return and risk, but now you must really understand what these variables mean. You have heard some people talk about making a “killing in the market,” but common sense tells you it can't be all that easy. Like the prospective investor asked the broker when the latter was showing him the yachts belonging to other brokers, “Where are the customers' yachts?” Also, you have on several occasions read about fraudulent investment schemes leaving people broke, but wiser. And so you realize you have your work cut out for you. You need to identify the important issues, ask the right questions, and learn the basics about successful investing.

You can, in fact, construct and manage your portfolio, as the following chapters will show. With a little tenacity, you can be on your way to an intelligent investing program, because basic knowledge can go a long way. Let's get ...