Chapter 1 the Investment Environment

Chapter 1 The Investment Environment 1. 1. Real Assets versus monetary Assets (Page 30) ? Real Assets ? Determine the productive dexterity and net income of the economy ? Examples Land, buildings, machines, and knowledge used to produce goods and services ? Financial Assets ? Claims on real assets 1-2 1. 2. Financial Assets (Page 32) ? Three types 1. Fixed income or debt Common investment firm or equity Derivative securities 2. 3. 1-3 Fixed Income ? ? ? ? 1-4 Payments determined or determined by a formula Money market debt short term, highly marketable, sually emit credit risk (T-bills, certificates of deposits etc) Capital market debt long term bonds, can be safe or risky (Treasury bonds, municipal bonds, corporate bonds, etc) Bond ratings in terms of default risk, from very safe to debris Common Stock and Derivatives ? Common Stock is equity or ownership in a corporation. ? ? Derivatives ? ? 1-5 Payments to stockholders be not fixed, but depend on the success of the firm Val ue derives from prices of other securities such as stocks and bonds Used to transfer risk (hedge) 1. 3.Financial Markets and the Economy (page 33-36) ? ? ? ? ? 1-6 Information Role Capital flows to companies with best prospects Consumption measure Use securities to store wealth and transfer consumption to the future Allocation of Risk Investors can make out securities consistent with their tastes for risk Separation of Ownership and Management minimize the famous agency costs and maximise firm value Corporate Governance and Corporate Ethics How to reduce the agency problems (Page 34-35) ? ? ? ? 1-7 Compensation plans bonus, stock options, etc.The power of the board of directors Outsiders monitor Threat of takeover proxy contest, mergers, etc. 1. 4. The Investment Process (page 36) ? When constructing a portfolio, investors need to decide ? ? 1-8 Asset allocation ? picking among broad asset classes Security selection ? Choice of which securities to hold within asset class ? Secur ity analysis to value securities and determine investment magnet 1. 4. The Investment Process (page 37) ? 1-9 Portfolio strategies ? Top-down starts from asset allocation Bottom-up starts from individual securities 1. 5. Markets are Competitive (page 37-39) ? Implications from no-free-lunch proposal ? ? Risk-Return Trade-Off Efficient Markets (security prices have reflected all information) (Chapter 11-12) ? Passive management ? No attempt to find undervalued securities ? No ? attempt to time the market ? Holding a highly diversified portfolio Active Management ? ? 1-10 determination mispriced securities Timing the market 1. 6. The Players (page 39-42) ? ? ? ? Business Firms net borrowersHouseholds net savers Governments can be both borrowers and savers Financial Intermediaries share and invest funds ? Investment Companies ? Banks ? Insurance companies ? Credit unions 1-11 Universal Bank Activities Investment Banking Underwrite untested stock and bond issues Sell newly issue d securities to public in the primary market Investors trade previously issued securities among themselves in the secondary markets Commercial Banking Take deposits and make loans 1-12 1. 7. Financial Crisis of 2008 Reading (page 42-51) 1-13