Chapter 1 Flashcards
What are real assets?
Assets used to produce goods and services
What are financial assets?
Claims on real assets or the income generated
What are types of financial assets?
Fixed-income securities
- Specified cash flow over a specific period
Equity
- Ownership share in a corporation
Derivative securities
- Securities providing payoffs that depend on values of assets
What is consumption timing?
Use securities to store wealth
Transfer consumption to the future
What is risk allocation?
Investors select desired risk level
What is corporate governance and ethics?
Businesses and markets require trust
Governance and ethics failure cost the economy
What is asset allocation?
Allocation of an investment portfolio across broad asset classes
- primary determinant of a portfolio’s return
- % of fund in asset classes
What is security selection?
Choice of particular securities within asset class
What is security analysis?
Analysis of the value of securities
What is a risk-return trade-off?
Higher expected returns = higher risk
How does diversification affect risk?
Passive management
- buy and hold diversified portfolio
- no attempt to identify mispriced securities
Active management
- identify mispriced securities
Who is in the market?
Businesses - borrowers
Households - savers
Governments - both
Financial intermediaries - connects borrowers and lenders
Investment bankers
What are investment bankers?
Specialize in primary market transactions
Primary market
- newly issued securities offered to public
- ‘underwrites’ issue
Secondary market
- preexisting securities traded among investors
May become commercial banks
What is a venture capital?
Equity investment to finance new firm
What is a private equity?
Investments in privately-held companies
What is securitization in housing finance?
Pooling loans into standardized securities back by loans
Can be traded like any other security
What are changes in housing finance?
Low/no-documentation loans
Rising loan-to-value ratio
Adjustable-rate mortgages
