文档介绍：Chapter1 The Investment
Setting
After you read this chapter, you should be able to answer the following questions:
➤ Why do individuals invest?
➤ What is an investment?
➤ How do investors measure the rate of return on an investment?
➤ How do investors measure the risk related to alternative investments?
➤ What factors contribute to the rates of return that investors require on alternative
investments?
➤ What macroeconomic and microeconomic factors contribute to changes in the required
rates of return for individual investments and investments in general?
This initial chapter discusses several topics basic to the subsequent chapters. We begin by
defining the term investment and discussing the returns and risks related to investments. This
leads to a presentation of how to measure the expected and historical rates of returns for an indi-
vidual asset or a portfolio of assets. In addition, we consider how to measure risk not only for an
individual investment but also for an investment that is part of a portfolio.
The third section of the chapter discusses the factors that determine the required rate of return
for an individual investment. The factors discussed are those that contribute to an asset’s total
risk. Because most investors have a portfolio of investments, it is necessary to consider how to
measure the risk of an asset when it is a part of a large portfolio of assets. The risk that prevails
when an asset is part of a diversified portfolio is referred to as its systematic risk.
The final section deals with what causes changes in an asset’s required rate of return over
time. Changes occur because of both macroeconomic events that affect all investment assets and
microeconomic events that affect the specific asset.
WHAT ISANINVESTMENT?
For most of your life, you will be earning and spending money. Rarely, though, will your current
money e exactly balance with your consumption desires. Sometimes, you may have m