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Investments - Introduction

Investments - Introduction. Riccardo Colacito. Assets. Real Assets Assets used to produce goods and services Financial Assets Claims on real assets. Balance Sheet – U.S. Households. Major Classes of Financial Assets or Securities. Fixed Income or Debt

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Investments - Introduction

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  1. Investments - Introduction Riccardo Colacito

  2. Assets • Real Assets • Assets used to produce goods and services • Financial Assets • Claims on real assets

  3. Balance Sheet – U.S. Households

  4. Major Classes of Financial Assets or Securities • Fixed Income or Debt • Money market (e.g.T-Bills): low risk • Capital market: variety of risks • Equity • Ownership share in the corporation • Derivative securities • Call or Put options • Futures

  5. Why do we invest? • Essential nature of investment • Reduced current consumption • Planned later consumption • Consumption Timing • Allocation of Risk

  6. Ownership and Management • Separation of Ownership and Management • Agency Issues: managers may wish to pursue their own interests • Stock option compensations • Does this system work well?

  7. Crisis in Corporate Governance • Accounting Scandals • Examples – Enron and WorldCom • Analyst Scandals • Example – Citigroup’s Salomon Smith Barney • Initial Public Offerings • Credit Swiss First Boston

  8. The Investment Process • Asset allocation • Choice among broad asset classes • Security selection • Choice of particular securities within each class • Security analysis • Analysis of the value of securities

  9. Competitive Markets • No free lunches! • Risk-return trade-off • Market efficiency

  10. Active vs. 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

  11. Players in the Financial Markets • Business Firms – net borrowers • Households – net savers • Governments – can be both borrowers and savers • Financial Intermediaries • Investment Companies

  12. Key Trends • Globalization • Securitization • Financial Engineering

  13. Key Trends - Globalization International and Global Markets Continue Developing • Diversification to improve performance • Managing foreign exchange • Instruments and vehicles continue to develop (WEBs) • Exchange rate risk

  14. Key Trends - Securitization • Mortgages can be traded like other securities • Pass-through securities • Majority of home mortgages pooled into mortgage-backed securities

  15. Asset-backed Securities

  16. An update on mortgage backed securities

  17. Key Trends - Financial Engineering • Repackaging Services of Financial Intermediaries • Bundling and unbundling of cash flows • Slicing and dicing of cash flows

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