Lecture 1 - Intro

Question 1

Part 2:

Introduction to Financial Analysis

Answer 1

Learning objectives:

• Understand the differences between real and financial assets and know why the performance of financial assets is determined by the performance of real assets
• Understand how capital market investments are made
• Understand what an asset class is and how different asset classes are traded
• Understand what buying on margin and short selling are and understand the risks associated with these transactions

Question 2

Part 2.1:

Introduction to Financial Analysis - The Investment Environment

Question 3

Real Assets

• Definition (2)

Answer 3

• The wealth of an economy is determined by its productive capacity
  
  • How much goods and services can an economy create?
• This capacity is (among others) a function of the real assets of the economy

Question 4

Real Assets:

• Examples (4)

Answer 4

• Land
• Buildings
• Machines
• Knowledge
• etc.
  *

Question 5

Financial Assets:

• Definition (3)

Answer 5

• Are the means by which individuals claim the income generated by real assets (d: Mittel mit denen Individuen das Einkommen aus “real assets” geltend machen)
• They distribute the wealth generated by the real asset among the individuals in an economy
• They allow allocation of wealth over time

Question 6

Financial Assets:

• Examples (2)

Answer 6

• Stocks
• Bonds
• etc.

Question 7

Who are issuers of financial assets (i.e.) and what do they do?

Answer 7

E.g. companies, governments. They use proceeds raised by claims to buy real assets.

Question 8

What drives housing prices? (7)

Answer 8

• Population
• Inelastic supply of land (land is very restricted)
• Inflation (hedge against inflation)
• Politics (Zweitwohnungsinitiative)
• Interest rates
  
  • interest rates go down, mortage rates go down -> more ppl can afford housing
  • ppl desperately looking for investment opportunities
• Share prices
• GDP (if GDP goes up, housing prices go up too)
  
  • gross domestic product

Question 9

What is an investor’s portfolio?

Answer 9

His collection of assets.

Question 10

Before setting up a portfolio, every investor should think about … (3)

-> The investment process

Answer 10

1. Asset allocation
2. Choice of portfolio management
3. Security selection (choice of security within an asset class)

Question 11

Repeat the investment process (3) and explain #1 (2)

Answer 11

1. Asset allocation
   
   • Stratecic allocation: Choice between different asset classes (bonds, stocks, derivatives etc.)
   • Tactical allocation: Deviation from weights invested in different asset classes compared to strategic allocation
2. Choice of portfolio management
3. Security selection (choice of security within an asset class)

Question 12

Repeat the investment process (3) and explain #2 (2)

Answer 12

1. Asset allocation
2. Choice of portfolio management
   
   • Active portfolio management: Actively searching for “undervalued” assets
   • Passive portfolio management: Buy-and-hold approach
3. Security selection (choice of security within an asset class)

Question 13

What is the most fundamental decision of investing regarding to John Bogle, Chairman of Vanguard?

Answer 13

The most fundamental decision of investing is the allocation of your assets: How much should you own in stock? How much should you own in bonds? How much should you own in cash reserves?… That decision [has been shown to account] for an astonishing 94% of the differences in total returns achieved by institutionally managed pension funds… There is no reason to believe that the same relationship does not hold true for individual investors.

Question 14

What are the players on financial markets? (4)

Answer 14

1. Companies
2. Households
3. Governments
4. Financial intermediaries

Question 15

Repeat the players on the financial markets (4) and explain #1 (2).

Answer 15

1. Companies
   
   • Are net borrowers
   • Raise capital in the security markets (usually common stock and bonds) to invest in real assets. The return generated by these real assets provides the return to holder of the securities (investors)
2. Households
3. Governments
4. Financial intermediaries

Question 16

Repeat the players on the financial markets (4) and explain #2 (2).

Answer 16

1. Companies
2. Households
   
   • Are net savers
   • Purchase securities issued by companies to invest their savings
3. Governments
4. Financial intermediaries

Question 17

Repeat the players on the financial markets (4) and explain #3 (2).

Answer 17

1. Companies
2. Households
3. Governments
   
   • Can be net savers (e.g. Norway, Singapore) or net borrowers (which is usually the case)
   • Borrow funds to invest in infrastructure (streets, bridges, universities etc.), repayment is guaranteed by taxes
4. Finanical intermediaries

Question 18

Repeat the players on the financial markets (4) and explain #4 (2).

Answer 18

1. Companies
2. Households
3. Governments
4. Financial intermediaries
   
   • Their role is to match supply and demand of capital
   • They perform a transformation function with respect to:
     
     • Liquidity
     • Maturity
     • Size
     • Risk

Question 19

Repeat the players on the financial markets (4) and give examples for #4 (4).

Answer 19

1. Companies
2. Households
3. Governments
4. Financial intermediaries:
   
   • Banks (Commercial banks and investment banks)
   • Insurance companies
   • Investment companies (Pension funds, Hedge funds etc.)
   • Credit unions

Question 20

Part 2.2:

Introduction to Financial Analysis - Asset Classes and Financial Instruments