Summary
Chapter 1 and 2 summary notes
- Institution
- Royal Holloway University Of London
- Book
- Investments
Covers all essential information in chapter 1 and 2 including definitions and key notes
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Chapter 1 – Investment Environment Investment – current commitment of money or other resources in
expectation of reaping future benefits
Real assets - Assets used to produce goods and services such as land,
buildings, and equipment and knowledge to produce g + s
Financial asset – stocks and bonds
3 broad types of financial asset : fixed income. equity, and derivatives.
Stock prices are reflected by investors expectations as if it is optimistic
they will be higher
Mechanisms to mitigate agency problems include – compensation plans,
Options, force out underperforming management teams, security analysts
monitoring the firm., bad performers are subject to threat of takeover –
can launch a proxy contest to obtain enough proxies – right to vote for the
shares of other stakeholders to take control of the firm and vote in
another board.
The material wealth of a society, determined by the productive capacity of
the economy is a function of real asset,
real assets generate net income to the economy, financial assets defined
the allocation of income or wealth among investors.
Fixed income securities - A security such as a bond that pays a specified
cash flow over a specific period. - floating rate bonds and junk bonds
Debt securities - Bonds; also called fixed-income securities.
Money market refers to securities that are short term and low risk such as
treasury bills and CD's, bank certificates of deposit.
Fixed income capital market includes long term securities such as treasury
bonds and bonds issued from federal agencies, they are very safe in terms
of default risk.
Derivative securities - A security whose payoff depends on the value of
other financial variables such as stock prices, interest rates, or exchange
rates. Main use is to hedge risks and transfer to other parties.
Investor’s portfolio is collection of investment assets. It is updated or
rebalanced by selling existing securities and buying new securities.
Investors have 2 types of decisions in constructing portfolio:
1. Asset allocation - Allocating a portfolio across broad asset classes such
as stocks versus bonds.
2. Security selection - choice of specific securities within a given asset
class
Top-down portfolio construction starts with asset allocation then looks at
particular securities to be held in each asset class.
Security analysis – valuation of particular securities that might be included
In portfolios
Bottom up – portfolio is constructed from securities that are good prices //
focuses on portfolio on assets that offer most investment opportunities,
Risk return trade off in securities market - Assets with higher expected
return entail greater risk.
Diversification means that many assets are held in the portfolio so that
exposure to any particular asset is limited.
Passive management - Buying a diversified portfolio, often a broad-based
market index, without attempting to identify mispriced securities.
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