Chapter 7 Flashcards
What are the major investment objectives faced by most investors?
Growth and Income
Growth Objective
The primary goal of this “savings” objective is capital appreciation and it implies a long term horizon w/ no immediate need to use the cash being invested.
Income Objective
The primary goal of this objective is a high current cash payout rate on a short term horizon.
Constraints and Concerns Affecting Most Investors
o Risk: The possibility that future investment performance may vary over time in a manner that is not entirely predictable.
o Liquidity: The ability to sell and buy investment assets quickly at full value and without much affecting the price of the assets.
o Time Horizon: The future time over which the investor’s objectives, constraints, and concerns are relevant.
o Investor Expertise and Management Burden: How much knowledge, ability, and desire the investor has to manage the investment process and assets.
o Investor Size: How “big” the investor is in terms of the amount of capital in need of investment.
o Capital constraint: Whether the investor faces an absolute constraint on the amount of capital he has available to invest, or can obtain additional capital relatively easily if good investment opportunities are available
Investor Heterogeneity
A key implication of the range of investment objectives and constraints is that investors are heterogeneous and have different personal goals and lifestyles, they are at different points in life, and they have different amounts of wealth. The ideal investment for one investor will not be the same as the ideal investment for another investor.
One implication of investor heterogeneity is that this lays the foundation for a market in investment products. Different products can be tailored to different objectives and constraints, and heterogeneity means that some investors will want to buy when other investors want to sell, thereby creating liquidity in the asset marketplace
Debt
Debt is at the bottom of the capital stack and is an amount of money borrowed by one party from another for the property’s acquisition or development.
Equity
Equity is at the top of the capital stack and involves ownership. It is the riskiest position of the capital structure as equity investors are paid last. Equity represents the shareholders’ stake in the asset.
Capital Stack
Total capital invested in a project
REIT
A real estate investment trust (REIT) is a corporate entity or trust that invests in real estate. A
REIT operates very much like a mutual fund that invests in stocks, but in this instance, it invests
in one or more real estate properties. REITs allow investors to invest in a diversified portfolio of
real estate holdings; this arrangement helps reduce the risk and volatility of owning a single
piece of real estate.
CMBS
Commercial mortgage-backed securities (CMBS) are secured by mortgages on commercial properties rather than residential real estate. They’re effectively the backbone of commercial property financing. A CMBS can provide liquidity to real estate investors and commercial lenders.
Major Investment Asset Classes
Cash (T-bills)
Stocks
Bonds
Real estate
Risk and Return
Return on investment is compensation for risk taken and expected returns should be greater for more risky assets.
Risk Free Rate
The theoretical rate of return of an investment with zero risk.
