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Investment Environment

The document provides an overview of investments including the difference between real and financial assets, major classes of financial assets, the investment process, and recent trends in areas like globalization, securitization, and computer networks.

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Rahman Shamim
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40 views

Investment Environment

The document provides an overview of investments including the difference between real and financial assets, major classes of financial assets, the investment process, and recent trends in areas like globalization, securitization, and computer networks.

Uploaded by

Rahman Shamim
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/ 29

CHAPTER 1

Investments - Background
and Issues

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1.1 REAL ASSETS VERSUS
FINANCIAL ASSETS

1-2
Financial Versus Real Assets
Essential nature of investment
– Reduced current consumption
– Planned later consumption
Real Assets
– Assets used to produce goods and
services
Financial Assets
– Claims on real assets

1-3
Table 1.1. Balance Sheet – U.S.
Households, 2006

1-4
Table 1.2 Domestic Net Worth,
2006

1-5
1.2 A TAXONOMY OF FINANCIAL ASSETS

1-6
Major Classes of Financial Assets
or Securities
Debt
– Money market instruments
Bank certificates of deposit
– Capital market instruments
Bonds
Common stock
Preferred stock
Derivative securities

1-7
1.3 FINANCIAL MARKETS AND
THE ECONOMY

1-8
Financial Markets

Informational Role of Financials Markets


– The Google effect
Consumption Timing
Allocation of Risk
Separation of Ownership and
Management
– Agency Issues

1-9
Corporate Governance and Ethics

Accounting Scandals
– Examples – Enron and WorldCom
Misleading research reports
Auditors watchdogs or consultants
– Example – Arthur Andersen and Enron
Sarbanes-Oxley Act
– Tighten the rules of corporate governance

1-10
1.4 THE INVESTMENT PROCESS

1-11
The Investor’s Portfolio

Asset allocation
– Choice among broad asset classes
Security selection
– Choice of which securities to hold within asset
class
Security selection

1-12
1.5 MARKETS ARE COMPETITIVE

1-13
Risk-Return Trade-Off
How should one measure risk
Assets with higher expected returns have
greater risk
What role does diversification play

1-14
Efficient Markets Theory
Should be neither underpriced nor
overpriced securities
Security price should reflect all information
available to investors

1-15
Active Versus Passive Management

Active Management
Finding undervalued securities
Timing the market

Passive Management
No attempt to find undervalued securities
No attempt to time
Holding an efficient portfolio

1-16
1.6 THE PLAYERS

1-17
The Players

Business Firms – net borrowers


Households – net savers
Governments – can be both borrowers and
savers
Financial Intermediaries
– Banks
– Investment companies
– Insurance companies
– Credit unions
Investment Bankers

1-18
Table 1.3 Balance Sheet of
Commercial Banks

1-19
Table 1.4 Balance Sheet of
Nonfinancial U.S. Business

1-20
1.7 RECENT TRENDS

1-21
Globalization

Managing foreign exchange


Diversification to improve performance
Instruments and vehicles continue to
develop (WEBs)
Information and analysis improves

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Figure 1.1 Global Debt Issue

1-23
Securitization

Offers opportunities for investors and


originators
Changes in financial institutions and regulation
Improvement in information capabilities
Credit enhancement and its role

1-24
Figure 1.2 Asset-backed Securities
Outstanding

1-25
Financial Engineering
Repackaging Services of Financial
Intermediaries
Bundling and unbundling of cash flows
Slicing and dicing of cash flows
Examples: strips, CMOs, dual purpose funds,
principal/interest splits

1-26
Figure 1.3 Building a Complex Security

1-27
Unbundling – Mortgage Security

1-28
Computer Networks
Online trading
Information made cheaply and widely
available
Direct trading among investors

1-29

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