Essentials of Investment Chapter 1
1. types of financial assets?:
1. debt
2. equity
3. derivatives
2. What is society's wealth?: the economic productive capacity
3. How do real assets contribute to an economy's productive capacity?: By
generating net income.Financial assets are just the claims on generated income
from real assets.
4. Financial Markets allow for consumption timing. What does this mean?:
When we are young, we sometimes earn more than we want to spend. When
we are old, we spend more than we earn. We can invest savings in financial
assets and sell them when we need funds.
5. how do financial markets allow for risk allocation?: allows for more risk
tolerant individuals and less risk tolerant people to be able to invest.
6. how do financial markets allow for separation of ownership and
management?: by the ability to buy and sell assets in financial markets. There
are agency problems and conflicts of interest between managers and
stockholders.
7. Solutions to agency problems?:
1. Compensation plans tied to manager's income to firm's success.
2. B of D can force out underperforming management teams.
3. Outsiders such as security analysts and large institutional investors monitor the
firm.
4. Bad performers are subject to a takeover.
8. How can the B of D be replaced?: by shareholders electing new board.
Usually fails.
9. What do investors decide on when making their portfolios?: 1. Asset
allocation- choosing what kind of assets they want to hold
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1. types of financial assets?:
1. debt
2. equity
3. derivatives
2. What is society's wealth?: the economic productive capacity
3. How do real assets contribute to an economy's productive capacity?: By
generating net income.Financial assets are just the claims on generated income
from real assets.
4. Financial Markets allow for consumption timing. What does this mean?:
When we are young, we sometimes earn more than we want to spend. When
we are old, we spend more than we earn. We can invest savings in financial
assets and sell them when we need funds.
5. how do financial markets allow for risk allocation?: allows for more risk
tolerant individuals and less risk tolerant people to be able to invest.
6. how do financial markets allow for separation of ownership and
management?: by the ability to buy and sell assets in financial markets. There
are agency problems and conflicts of interest between managers and
stockholders.
7. Solutions to agency problems?:
1. Compensation plans tied to manager's income to firm's success.
2. B of D can force out underperforming management teams.
3. Outsiders such as security analysts and large institutional investors monitor the
firm.
4. Bad performers are subject to a takeover.
8. How can the B of D be replaced?: by shareholders electing new board.
Usually fails.
9. What do investors decide on when making their portfolios?: 1. Asset
allocation- choosing what kind of assets they want to hold
1/3
