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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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assets
Assets
  • Real Assets
    • Assets used to produce goods and services
  • Financial Assets
    • Claims on real assets
major classes of financial assets or securities
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
why do we invest
Why do we invest?
  • Essential nature of investment
    • Reduced current consumption
    • Planned later consumption
  • Consumption Timing
  • Allocation of Risk
ownership and management
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?
crisis in corporate governance
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
the investment process
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
competitive markets
Competitive Markets
  • No free lunches!
  • Risk-return trade-off
  • Market efficiency
active vs passive management
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
players in the financial markets
Players in the Financial Markets
  • Business Firms – net borrowers
  • Households – net savers
  • Governments – can be both borrowers and savers
  • Financial Intermediaries
  • Investment Companies
key trends
Key Trends
  • Globalization
  • Securitization
  • Financial Engineering
key trends globalization
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
key trends securitization
Key Trends - Securitization
  • Mortgages can be traded like other securities
  • Pass-through securities
  • Majority of home mortgages pooled into mortgage-backed securities
key trends financial engineering
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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