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CHAPTER 1

The Investment Environment. CHAPTER 1. Real Assets Versus Financial 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.

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CHAPTER 1

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  1. The Investment Environment CHAPTER 1

  2. Real Assets Versus Financial 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

  3. Table 1.1 Balance Sheet of U.S. Households, 2007

  4. Table 1.2 Domestic Net Worth

  5. A Taxonomy of Financial Assets • Fixed income or debt • Money market instruments • Bank certificates of deposit • Capital market instruments • Bonds • Common stock or equity • Derivative securities

  6. Financial Markets and the Economy Information Role The Google effect Consumption Timing Allocation of Risk Separation of Ownership and Management Agency Issues

  7. Financial Markets and the Economy Continued 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

  8. The Investment Process Asset allocation Choice among broad asset classes like stocks, bonds, real estate, commodities Security selection Choice of which securities to hold within asset class Security analysis

  9. Markets are Competitive Risk-Return Trade-Off (no free lunch) Efficient Markets: price reflects all info. Active Management Finding mispriced securities Timing the market Passive Management No attempt to find undervalued securities No attempt to time the market Holding a highly diversified portfolio

  10. The Players Business Firms– net borrowers Households – net savers Governments – can be both borrowers and savers Financial Intermediaries Investment Companies; invests mainly in securities Banks Insurance companies Credit unions

  11. The Players Continued Investment Bankers:Goldman Sachs, Citigroup, J.P.Morgan Perform specialized services for businesses such as issuing securities for firms Markets in the primary market

  12. Table 1.3 Balance Sheet of Commercial Banks, 2007

  13. Table 1.4 Balance Sheet of Nonfinancial U.S. Business, 2007

  14. Recent Trends—Globalization American Depository Receipts (ADRs) claim in shares of a foreign company Foreign securities offered in dollars Mutual funds that invest internationally Variant of ADR: Exchange Traded Funds (ETFs) ,diversified investment in foreign shares, e.g. iSHAREs, WEBS

  15. Figure 1.1 Globalization: A Debt Issue Denominated in Euros

  16. Recent Trends—Securitization Mortgage pass-through securities Other pass-through arrangements Car, student, home equity, credit card loans Offers opportunities for investors and originators

  17. Figure 1.2 Asset-backed Securities Outstanding

  18. Recent Trends—Financial Engineering Use of mathematical models and computer-based trading technology to synthesize new financial products Bundling and unbundling of cash flows

  19. Figure 1.3 Building Creates a Complex Security

  20. Figure 1.4 Unbundling of Mortgages into Principal- and Interest-Only Securities

  21. Recent Trends—Computer Networks Online information dissemination customer's direct access to an on-line broker Information is made cheaply and widely available to the public Automated trade crossing Direct trading among investors

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