Lecture 1 Flashcards
Describe the essential nature of investment.
Reduced current consumption for planned later consumption
What are real assets and financial assets and give examples of each.
Real assets are assets used to produce goods and services such as land, buildings and machines.
Financial assets are claims on real assets such as stocks and bonds
What is a utility or indifference curve?
Represents for example investors’ preference for income in the two periods. These curves are constructed so that everywhere along the same curve the investor is assumed to be equally happy.
What determines the steepness of a utility curve?
Personal preferences such as risk aversion
What is a portfolio and what two ways do investors use to construct a portfolio?
Collection of investment assets.
Asset allocation is choice among broad asset classes and security selection is choice of securities within each asset class.
What is a top-down security analysis?
Start with asset allocation and than the security selection.
What is active and passive management?
Active management is finding mispriced securities and try to time the market. You should ask yourself is this is really profitable because the costs and fees are high.
Passive management is no attempt to find undervalued securities or to time the market. It is just holding a highly diversified portfolio. Thus, much lower costs and fees than active management.
What is a bottom-up security analysis?
Pick attractively priced securities, without much concern for asset allocation.
Who are the three major players in the investment environment and which 4 organizations are in between these relationships?
Firms
Households
Governments
Financial intermediaries (investment companies, hedge funds, insurance companies)
Investment banks
Venture Capital
Private Equity
Which two financial markets are there?
Money market - short term, liquid, low-risk
Capital market - longer term, more risky
What are derivative markets?
Market for derivative assets, a claim whose value is contingent on the value of some underlying asset. Options (call/put) and futures
What are options?
Contract that gives owner the right to buy or sell, exercised only when profitable and it must be purchased (at a certain price)
What are futures?
Contract that gives owner the obligation to make or take delivery or to buy/sell at futures price, contract is entered without costs.
How do firms issue securities?
Firms can raise funds by borrowing money or selling shares in the primary market or secondary market.
What is the difference between publicly listed firms and private corporations in terms of shares?
Publicly listed firms’ shares are traded publicly in markets, while private corporations’ shares are hold by small number of managers and investors (OTC)
