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The Investment Environment

This document discusses the key concepts around real assets versus financial assets. It outlines the three main types of financial assets - fixed income, common stock, and derivative securities. It also summarizes the roles of financial markets in allocating resources, transferring risk, and separating ownership from management. Finally, it introduces the main players in financial markets including business firms, households, governments, and financial intermediaries.

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Salam Nazmi Mahmoud Al-Quran
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46 views

The Investment Environment

This document discusses the key concepts around real assets versus financial assets. It outlines the three main types of financial assets - fixed income, common stock, and derivative securities. It also summarizes the roles of financial markets in allocating resources, transferring risk, and separating ownership from management. Finally, it introduces the main players in financial markets including business firms, households, governments, and financial intermediaries.

Uploaded by

Salam Nazmi Mahmoud Al-Quran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 14

Chapter 1

The Investment Environment


Real Assets Versus Financial Assets
• Real Assets
– Determine the productive capacity and net
income of the economy
– Examples: Land, buildings, machines,
knowledge used to produce goods and
services

• Financial Assets
– Claims on real assets

1-2
Financial Assets

• Three types:
1. Fixed income or debt
2. Common stock or equity
3. Derivative securities

1-3
Fixed Income
• Payments fixed or determined by a
formula

• Money market debt: short term, highly


marketable, usually low credit risk

• Capital market debt: long term bonds, can


be safe or risky

1-4
Common Stock and Derivatives
• Common Stock is equity or ownership in a
corporation.
– Payments to stockholders are not fixed, but
depend on the success of the firm
• Derivatives
– Value derives from prices of other securities,
such as stocks and bonds
– Used to transfer risk

1-5
Financial Markets and the Economy

• Information Role: Capital flows to


companies with best prospects

• Consumption Timing: Use securities to


store wealth and transfer consumption
to the future

1-6
Financial Markets and the
Economy (Ctd.)

• Allocation of Risk: Investors can select


securities consistent with their tastes for
risk

• Separation of Ownership and


Management: With stability comes agency
problems

1-7
Financial Markets and the
Economy (Ctd.)
• Corporate Governance and Corporate Ethics
– Accounting Scandals
• Examples – Enron, Rite Aid, HealthSouth
– Auditors – watchdogs of the firms
– Analyst Scandals
• Arthur Andersen
– Sarbanes-Oxley Act
• Tighten the rules of corporate governance

1-8
The Investment Process

• Asset allocation
– Choice among broad asset classes
• Security selection
– Choice of which securities to hold within
asset class
– Security analysis to value securities and
determine investment attractiveness

1-9
Markets are Competitive

• Risk-Return Trade-Off

• Efficient Markets
– Active Management
• Finding mispriced securities
• Timing the market

1-10
Markets are Competitive (Ctd.)
– Passive Management
• No attempt to find undervalued
securities
• No attempt to time the market
• Holding a highly diversified portfolio

1-11
The Players

• Business Firms– net borrowers

• Households – net savers

• Governments – can be both borrowers and


savers

1-12
The Players (Ctd.)
• Financial Intermediaries: Pool and invest funds
– Investment Companies
– Banks
– Insurance companies
– Credit unions

1-13
Universal Bank Activities
Investment Banking Commercial Banking
• Underwrite new stock
and bond issues • Take deposits and make
• Sell newly issued loans
securities to public in the
primary market
• Investors trade previously
issued securities among
themselves in the
secondary markets

1-14

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