Introduction

An Introduction to Investment Theory

Finance in six pictures — the figures that carry the logic of financial reasoning.

This book is written for visual thinkers. Three decades of teaching finance have persuaded me that most of financial theory relies on intuitions that a handful of simple pictures can convey. Learn to read six of them — really read them — and you will hold the working core of modern financial reasoning.

The claim of this book is deliberately strong: if you understand these six figures, together with the logic and the assumptions beneath them, you will have a working knowledge of investment theory. They are models you can use yourself — to plan, to price, to hedge, to decide — and they are useful even to the reader who never touches the mathematics.

The Six Pictures

Picture 1 Compound Growth The growth of a dollar over time — the foundation of long-horizon investing, and one of the oldest ideas in finance. Chapter I → Picture 2 Risk & Return The efficient frontier — how combining risky assets creates possibilities no single asset offers. The only free lunch in finance. Chapter II → Picture 3 The Price of Risk The Security Market Line — how the market rewards only the risk you cannot diversify away, setting the return every asset must earn. Chapters IV–V → Picture 4 Market Efficiency Booms and crashes that look wildly different beforehand settle onto the same average path afterward, because the market had already priced them — the defining feature of an efficient market. Chapter VIII → Picture 5 The Payoff The option diagram — the hockey stick. How contingent claims reshape outcomes, and why optionality appears throughout finance. Chapter IX → Picture 6 Bond Duration Price against the interest rate — how the value of a fixed promise moves when rates move, and how to measure and manage that sensitivity. Chapter XI →

How to Read Each Picture

Every figure in this book is examined through the same four lenses. The first three stand on their own; the fourth is there for those who want it.

1. The logic

What the picture says, in plain terms, before any algebra — the idea it captures and why it matters.

2. How it moves

How its shape and key points shift as you change the assumptions and inputs. The interactive figures let you push on them yourself.

3. How you use it

The part too often skipped — how a practitioner actually deploys the figure to make a decision: to size a position, price a security, hedge an exposure, set a discount rate.

4. The math (optional)

The theory and derivation underneath, boxed off for the mathematically inclined. Skip it freely; the picture still works without it.

Key Idea

These six pictures are not isolated topics; they recur — as motifs, as tools, and as ways of seeing — throughout the chapters that follow. Master them, and you will be able to reason with finance.

A closing invitation, carried through the whole book: play with each picture. The most useful insights come from posing your own questions — when, how, and why does this figure change?

Begin with Picture 1: Compound Growth →

Acknowledgement: Several of the interactive figures in this book were inspired by the Rice Business Investments Compendium, created and maintained by Kerry Back and Kevin Crotty at the Jones Graduate School of Business, Rice University. We gratefully acknowledge their contribution to investment education.