Investments [antikvár]

There are many kinds of investments, and this text deals with one very important kind-investment in financial claims, such as stocks and bonds. This chapter begins by distinguishing among the kinds of investments discussed in this book and then explains the goals of investing in securities. Like all investments, investment in financial claims requires the reduction of consumption in the present in the hope of increasing consumption opportunities in the future. The increase in consumption in later periods is the return on the investment, and it is the anticipation of this return that motivates the investor to reduce current consumption. Like all other kinds of investments, investing in financial claims involves the choice of somé level of risk. The investor can choose investments that have virtually no risk or investments that have a great deal of risk. For the present, think of risk as the chance that the investment will have an undesirable result-such as the loss of the invested funds. Later in this chapter, we learn to measure risk quantitatively. The basic problem confronting any investor is to secure the desired return while avoiding undesired risk. The quick answer to this dilemma is to invest where there is high return and low risk. However, investment opportunities with high expected return are almost invariably accompanied by high risk. This basic fact makes the study of investments exciting and important, because the investor must find an answer to the following question: How can I find those investments with the best combination of risk and return? There is a trade-off between the good (high returns) and the bad (high risk), and the investor must know how to measure both returns and risk, and how to choose the investment with the most favorable combination. This chapter introduces the basic ideas of risk and return and the unavoidable trade-off between them, and it shows how to measure them. The chapter concludes with a survey of the organization of the book.