This chapter is meant to introduce the reader to the principal financial instruments, their return characteristics, and the indexes that are used to represent their returns. The nature of the material means that this chapter is much more descriptive than subsequent chapters. Those readers already familiar with financial instruments and the indexes that can be used to represent their returns can skip to Chapter 3. Those readers who have had a prior finance course and are familiar with financial instruments but are not familiar with the principal indexes used to represent their returns can skip to the section in this chapter titled “The Return Characteristics of Alternative Security Types.” We can think of a security as a legal contract representing the right to receive future benefits under a stated set of conditions. There are a large number of financial securities. When you take out a mortgage on a house or lease a car, the contract you sign is a financial security. We are going to limit the set of financial securities we deal with by selecting primarily from among those that are traded in organized markets. In fact, Chapter 3 will focus on the nature of alternative market structures for the securities described in this chapter.
In the first section of this chapter, we describe the characteristics of a broad sample of financial securities. In the second section, we examine the performance of a representative sample of financial assets to begin to understand ...