InvestMan 254 Notes
Ch1 – Background & Issues
Investment = the commitment of current resources in the expecta2on of future benefits.
Real & Financial Assets:
- Real Assets (direct) = assets used to produce goods and services
o Contribute directly to produc2vity
- Financial Assets (indirect) = claims on real assets
o Does not contribute to produc2vity directly
Financial Assets:
1. Fixed income securi2es
o ST = bills, notes
o LT = bonds (ins2tu2onal and government)
2. Equity
o Common stock (1st vo2ng right, paid out last)
o Preferred stock (no vo2ng right, paid out first)
3. Deriva2ve securi2es = value derived from other asset
o Op2ons (Choice, only lose what you paid for it)
o Futures (Contract, not choice)
Financial Markets:
- Financial assets allow us to make the most of the economy’s real assets
- Informa2on
o Play central role in the alloca2on of resources
- Consump2on 2ming
o “Store” wealth in financial assets for future use
- Alloca2on of risk
o Some are more risky than others
- Separa2on of ownership and management
o Agency problems = conflict of interest between managers and shareholders
o Principal agent problem = directors force managers to do what owners want
,Investment Process:
- Asset alloca2on = dividing investments among different assets
o stocks, bonds & cash
- Security selec2on = analysing and choosing investments that align with financial goals &
amt of risk you’re WTT.
- “Top-down vs BoYom-up
o Top-down = first choose the asset classes you want to invest in and the securi2es.
o BoYom-up = choose aYrac2vely priced securi2es without much concern for the
resultant asset alloca2on (look for bargains & mispricing).
Compe99ve Markets:
- “There is no such thing as a free lunch”
o Risk-return trade-off = rela2onship between the amount of risk taken and the
poten2al return on an investment.
o Market efficiency = how well current prices reflect all available, relevant info
about the actual value of the underlying assets.
- Ac2ve Management = finding undervalued securi2es
- Passive Management = no aYempt to find undervalued securi2es
o holding a diversified por\olio
o can make more money than ac2ve
The players:
- Firms, Households, Government
- Financial Intermediaries (banks)
- Investment Bankers = suppliers of cash to business.
- Venture Capital = helps small business, risky, high return.
- Private Equity = must approach business to invest in.
Recent Trends:
- Globaliza2on
- Securi2sa2on
- Financial engineering
- Computer networks
- 2008 financial crises:
o People buy houses on credit. Lenders buy peoples mortgages to earn a profit.
Soon so many people had mortgages, and some people stopped paying them off.
Mortgages as an income turned into just a house.
o These houses had to be sold to get the money back, but because so many were
for sale, the supply > demand.
, Ch2 – Background & Issues
Money Market = consists of very short-term, highly marketable debt securi2es.
- Low return rates & safety of principal investment.
- MM mutual funds are easily accessible to small investors.
o mutual funds pool the resources of many investors and purchase a wide variety
of money market securi2es on their behalf.
- Includes:
o T-Bills – reserve bank
o Cer2ficates of Deposit
o Commercial Paper – corpora2ons
o Eurodollars – en2ty in US issues/deposits dollars in foreign bank
o Repos – repurchase agreement
Bond Market = composed of longer-term borrowing or debt instruments than those that
trade in the MM.
- instruments are some2mes said to comprise the fixed- income capital market because
most of them promise either a fixed stream of income or stream of income that is
determined according to a specified formula.
- In prac2ce, can result in a flow of income that is far from fixed.
- Includes:
o Government Bonds
o Interna2onal Bonds
o Municipal Bonds
o Corporate Bonds
o Mortgage-Backed securi2es
Equity Securi9es = fin assets that represent ownership of a corpora2on.
- Common (Ordinary) Stock
o unlimited upside
o vote, last paid
- Preferred Stock
o Don’t vote, paid first, fixed div
o Cumula2ve – add up over 2me
o Par2cipa2ng – fixed div + get money for growth
o Conver2ble – into ordinary share
Ch1 – Background & Issues
Investment = the commitment of current resources in the expecta2on of future benefits.
Real & Financial Assets:
- Real Assets (direct) = assets used to produce goods and services
o Contribute directly to produc2vity
- Financial Assets (indirect) = claims on real assets
o Does not contribute to produc2vity directly
Financial Assets:
1. Fixed income securi2es
o ST = bills, notes
o LT = bonds (ins2tu2onal and government)
2. Equity
o Common stock (1st vo2ng right, paid out last)
o Preferred stock (no vo2ng right, paid out first)
3. Deriva2ve securi2es = value derived from other asset
o Op2ons (Choice, only lose what you paid for it)
o Futures (Contract, not choice)
Financial Markets:
- Financial assets allow us to make the most of the economy’s real assets
- Informa2on
o Play central role in the alloca2on of resources
- Consump2on 2ming
o “Store” wealth in financial assets for future use
- Alloca2on of risk
o Some are more risky than others
- Separa2on of ownership and management
o Agency problems = conflict of interest between managers and shareholders
o Principal agent problem = directors force managers to do what owners want
,Investment Process:
- Asset alloca2on = dividing investments among different assets
o stocks, bonds & cash
- Security selec2on = analysing and choosing investments that align with financial goals &
amt of risk you’re WTT.
- “Top-down vs BoYom-up
o Top-down = first choose the asset classes you want to invest in and the securi2es.
o BoYom-up = choose aYrac2vely priced securi2es without much concern for the
resultant asset alloca2on (look for bargains & mispricing).
Compe99ve Markets:
- “There is no such thing as a free lunch”
o Risk-return trade-off = rela2onship between the amount of risk taken and the
poten2al return on an investment.
o Market efficiency = how well current prices reflect all available, relevant info
about the actual value of the underlying assets.
- Ac2ve Management = finding undervalued securi2es
- Passive Management = no aYempt to find undervalued securi2es
o holding a diversified por\olio
o can make more money than ac2ve
The players:
- Firms, Households, Government
- Financial Intermediaries (banks)
- Investment Bankers = suppliers of cash to business.
- Venture Capital = helps small business, risky, high return.
- Private Equity = must approach business to invest in.
Recent Trends:
- Globaliza2on
- Securi2sa2on
- Financial engineering
- Computer networks
- 2008 financial crises:
o People buy houses on credit. Lenders buy peoples mortgages to earn a profit.
Soon so many people had mortgages, and some people stopped paying them off.
Mortgages as an income turned into just a house.
o These houses had to be sold to get the money back, but because so many were
for sale, the supply > demand.
, Ch2 – Background & Issues
Money Market = consists of very short-term, highly marketable debt securi2es.
- Low return rates & safety of principal investment.
- MM mutual funds are easily accessible to small investors.
o mutual funds pool the resources of many investors and purchase a wide variety
of money market securi2es on their behalf.
- Includes:
o T-Bills – reserve bank
o Cer2ficates of Deposit
o Commercial Paper – corpora2ons
o Eurodollars – en2ty in US issues/deposits dollars in foreign bank
o Repos – repurchase agreement
Bond Market = composed of longer-term borrowing or debt instruments than those that
trade in the MM.
- instruments are some2mes said to comprise the fixed- income capital market because
most of them promise either a fixed stream of income or stream of income that is
determined according to a specified formula.
- In prac2ce, can result in a flow of income that is far from fixed.
- Includes:
o Government Bonds
o Interna2onal Bonds
o Municipal Bonds
o Corporate Bonds
o Mortgage-Backed securi2es
Equity Securi9es = fin assets that represent ownership of a corpora2on.
- Common (Ordinary) Stock
o unlimited upside
o vote, last paid
- Preferred Stock
o Don’t vote, paid first, fixed div
o Cumula2ve – add up over 2me
o Par2cipa2ng – fixed div + get money for growth
o Conver2ble – into ordinary share
