Investment Environment Flashcards
What is a real asset?
Determines the productive capacity of the economy
EX: Land, buildings, machines, and knowledge that can be used to generate goods and services.
What is a financial Asset?
Claims to the income generated by real assets that define the allocation of wealth among investors.
Liabilities of others that do not contribute directly to the productive capacity of the economy.
Stocks, Bonds, cash, leases…claims to a real asset.
Consumption Timing
Save during times of high income (young) to allocate wealth in times of lower income (retired). Shifting wealth from high income to low income periods.
Allocation Risk
Investors can select securities that match their level of risk. EX: Stocks(higher risk) Vs. Bonds (Lower risk)
Asset Allocation
The choice among broad asset classes (Stocks, bonds, real estate, commodities, etc…)
Security Selection
The choice of which particular securities to hold within each asset class.
Top down approach
Starts with asset allocation and then security analysis is used to evaluate the particular securities to be held in each asset class.
Lower risk option - spread across many asset classes/stocks.
Bottoms up approach
The strategy to construct a portfolio from attractive securities without much concern for the resultant asset allocation.
Higher risk - potential to have heavy emphasis on 1 asset class/stock.
Efficient market
The theory that financial markets process all available information about securities quickly and efficiently, that is, that the security price usually reflects all the information available to investors concerning its value.
no under or overprices securities
Net demanders of capital are?
Firms - They raise capital now to pay for investments in plant and equipment. The returns go to the investors who purchase the securities in the firm.
Gov- Can be a demander or supplier.
Net suppliers of capital are?
Households - They purchase the securities issued by firms that need to raise capital
Financial Intermediaries are?
Bring the suppliers of capital (investors) together with the demanders of capital (Firms & Gov).
Issue their own funds securities to raise capital to purchase the securities of other corporations.
Primarily include - Banks, investment companies, insurance companies, and credit unions.
Primary Market
Where new issues of securities are offered to the public.
Uusually issued with the aid of an investment banker
Secondary Market
Market where investors can trade previously issues securities among themselves.
Systemic risk
A potential breakdown of the financial system where problems in one market spill over and disrupt others as well.
