Exam 1 - Chapter 1 [Book] Flashcards
Investment:
the current commitment
of money or other resources in the expectation of reaping future benefits.
Real assets:
the land, buildings, machines, and knowledge that can
be used to produce goods and services.
Financial assets:
such as stocks and bonds.
Fixed-income or debt securities :
promise either a fixed stream of
income or a stream of income determined by a specified formula.
What’s another name for Fixed-income
Debt securities
equity:
common stock, or equity, in a firm represents an ownership
share in the corporation.
derivative securities:
such as options and futures contracts provide payoffs that are determined by the prices of other assets such as bond or stock prices.
Stock prices reflect investors’ collective assessment
of a firm’s current performance and future prospects.
Virtually all real assets involve some ____
risk.
An investor’s portfolio is simply his collection of ______ _____
investment assets.
Asset allocation:
decision is the choice among these broad asset classes,
Security selection:
decision is the choice of which particular securities to hold within each asset class.
“Top-down” portfolio construction starts with ____ _____
asset allocation.
Security analysis:
involves the valuation of particular securities that might be included
in the portfolio.
Risk–return trade-off:
in the securities markets, with higher-risk assets priced to offer higher expected returns than lower-risk assets.
Passive management calls
for holding highly diversified portfolios without spending effort or other resources attempting to improve investment performance through security analysis.
Active management
is the attempt to improve performance either by identifying mispriced securities or by timing the performance of broad asset classes
Financial intermediaries:
have evolved to bring the suppliers of capital (investors) together with the demanders of capital (primarily corporations and the federal government).
Investment companies
which pool and manage the money of many investors, also arise out of economies of scale.
____ _____ that specialize in such activities can offer their services at a cost below that of maintaining an in-house security issuance division. In this role,
Investment bankers
What are Investment bankers also called?
Underwriters.
primary market, .
where new
issues of securities are offered to the public
The equity investment in these young companies is called _______ _____
venture capital (VC)
Securitization:
These pools, which were essentially claims on the underlying mortgages,
were soon dubbed mortgage-backed securities, and the process was called
This new financial model was brimming with ____ _____, a potential breakdown
of the financial system when problems in one market spill over and disrupt others.
Systemic risk
Later, investors can trade previously issued
securities among themselves in the so-called _____ ____
Secondary market.
Real assets create what?.
wealth
Financial assets represent
claims to parts or all of that wealth.
Financial
assets determines what?
how the ownership of real assets is distributed among investors.
Financial assets can be categorized as ____ _____,
fixed income
equity
derivative instruments.
Top-down
portfolio construction techniques start
with the asset allocation decision—the allocation of funds across broad asset classes—and then progress to more specific security-selection decisions.
Competition in financial markets leads to a
risk–return trade-off, in which securities that offer
higher expected rates of return also impose greater risks on investors.
Financial intermediaries
pool investor funds and invest them.
Investment banking brings
efficiency to corporate fundraising.
Investment bankers develop
expertise in pricing new issues and in marketing them to investors. By the end of 2008,
The financial crisis of 2008 showed the importance of _____ ______
systemic risk.
Systemic risk can be
limited by transparency that allows traders and investors to assess the risk of their counter parties; capital requirements to prevent trading participants from being brought down by potential losses; frequent settlement of gains or losses to prevent losses from accumulating beyond an
institution’s ability to bear them; incentives to discourage excessive risk taking; and accurate
and unbiased analysis by those charged with evaluating security risk.
