Lecture 1

Question 1

Describe the essential nature of investment.

Answer 1

Reduced current consumption for planned later consumption

Question 2

What are real assets and financial assets and give examples of each.

Answer 2

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

Question 3

What is a utility or indifference curve?

Answer 3

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.

Question 4

What determines the steepness of a utility curve?

Answer 4

Personal preferences such as risk aversion

Question 5

What is a portfolio and what two ways do investors use to construct a portfolio?

Answer 5

Collection of investment assets.
Asset allocation is choice among broad asset classes and security selection is choice of securities within each asset class.

Question 6

What is a top-down security analysis?

Answer 6

Start with asset allocation and than the security selection.

Question 7

What is active and passive management?

Answer 7

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.

Question 8

What is a bottom-up security analysis?

Answer 8

Pick attractively priced securities, without much concern for asset allocation.

Question 9

Who are the three major players in the investment environment and which 4 organizations are in between these relationships?

Answer 9

Firms
Households
Governments

Financial intermediaries (investment companies, hedge funds, insurance companies)
Investment banks
Venture Capital
Private Equity

Question 10

Which two financial markets are there?

Answer 10

Money market - short term, liquid, low-risk
Capital market - longer term, more risky

Question 11

What are derivative markets?

Answer 11

Market for derivative assets, a claim whose value is contingent on the value of some underlying asset. Options (call/put) and futures

Question 12

What are options?

Answer 12

Contract that gives owner the right to buy or sell, exercised only when profitable and it must be purchased (at a certain price)

Question 13

What are futures?

Answer 13

Contract that gives owner the obligation to make or take delivery or to buy/sell at futures price, contract is entered without costs.

Question 14

How do firms issue securities?

Answer 14

Firms can raise funds by borrowing money or selling shares in the primary market or secondary market.

Question 15

What is the difference between publicly listed firms and private corporations in terms of shares?

Answer 15

Publicly listed firms’ shares are traded publicly in markets, while private corporations’ shares are hold by small number of managers and investors (OTC)

Question 16

Who marketeers the new issued shares of a newly listed company?

Answer 16

Underwriter(s) marketeer(s) the stocks to investment bankers or companies in the primary market.

Question 17

What is an IPO road show?

Answer 17

A roadshow is a sales pitch to potential investors made up of a series of presentations leading up to an initial public offering.

Question 18

Who bears the price risk in an IPO?

Answer 18

The underwriter, he buys the shares at an agreed price and tries to sell them in the primary market for a higher price.

Question 19

What are three broad types of financial assets?

Answer 19

Fixed income
Equity
Derivatives

Question 20

What are fixed income assets?

Answer 20

Debt securities that give a fixed stream of income. Large variety in maturities and payment provisions but they are least dependent on the financial condition of issuer.

Question 21

What are equity assets?

Answer 21

Ownership of shares in a corporation. There is no promised payment (except dividends) but you get the gains or losses of the movement in price. It is dependent on the real assets and therefore more risky.

Question 22

What are the four functions of financial markets in the economy?

Answer 22

Informational role (reflect collective assessment of firms)
Consumption timing (ability to store your wealth in financial assets to postpone consumption)
Allocation of risk (different types of financial assets allow different types of risk profiles to invest)
Separation between ownership and management (when there are thousands of different shareholders, management has to be outsourced to maintain stability)

Question 23

Why are there financial intermediaries?

Answer 23

Because it is difficult for individual investors to monitor and asses credit risk, to diversify properly and to advertize their capital to borrowers.

Question 24

What is an investment banker?

Answer 24

An investment banker is a financial professional who helps companies, governments, and other entities raise capital by issuing stocks, bonds, or other securities. They also provide advisory services on mergers, acquisitions, and other financial transactions, helping clients manage large-scale financial decisions and strategies.

Question 25

What is venture capital and private equity?

Answer 25

Venture capital (VC) is a form of financing provided to early-stage, high-potential startups and small businesses in exchange for equity. Venture capitalists invest in companies with the goal of helping them grow rapidly, often focusing on innovative industries like tech or biotech. In return, they expect high returns on their investment if the company succeeds.

Private equity (PE) involves investing in more mature companies, often by buying a controlling stake, with the aim of improving their performance and eventually selling them for a profit. PE firms typically work with established businesses, restructuring them, cutting costs, or boosting growth before exiting the investment through a sale or public offering.

Question 26

Name three examples of securities in the money market.

Answer 26

Treasury Bill
Certificate of Deposit (time deposit)
Commercial Paper

Question 27

Name three examples of securities in the capital bond market.

Answer 27

Treasury Notes and Bonds (<10 years and 10-30 years)
Corporate Bond
Mortgage Securities