Investments Chapters 1-4 - Exam Questions & Verified Answers
How much is the US stock market up/down so far in 2020? ^7%
General info on stocks Stocks are forward looking
investing is about uncertainty
Knowledge and process can reduce uncertainty( and common sense)
If you are certain of an investment dont do it, so is everyone else.
What is the most FREQUENTLY used term to describe the Uncertainty
OUTLOOK for the financial markets?
What is an Investment? The commitment of current resources in the expectation of deriving greater return in
the future
Real Assets Used to produce goods and services: Property, plants and equipment, human
capital, etc.
Financial Assets Claims on real assets or claims on real-asset income
Real Assets- generate net income to the •When you buy securities (stocks or bonds) the issuing company uses the money to
economy•Financial assets-define the allocation of income pay for real assets
or wealth among investors •You have a claim on the income from those assets
•Ie STARBUCKS
Major Classes of Financial Assets or Securities Fixed-income (debt) securities•Promises a stream of income
•Corporate bonds, money market instruments, Bank certificates of deposit, treasury
securities commercial paper, etc.
•Preferred stock
•Common stock (equity)
•Ownership stake in entity, residual cash flow
•Derivative securities
•Contract, value derived from underlying market condition
Financial Markets and the Economy •Securities markets play important role in facilitating the deployment of capital to its
most productive use.
•Informational Role of Financial Markets-direct capital to firms with greatest
perceived potential
•Consumption Timing-acts as a store of wealth
•Allocation of Risk- allows efficient matching of risk seekers and risk takers
•Separation of Ownership and Management- allows companies to build scale
•Corporate Governance and Ethics-markets require TRUST to function
The Investment Process •Portfolio- a collection of investment assets-Stocks, bonds, real estate, commodities
etc.
•Two decisions are made to build an investment portfolio-Asset Allocation-Security
Selection
Investment Process •Asset Allocation- the choice among broad array of asset classes -Stocks, bonds,
real estate, commodities, alternative assets etc
Asset Allocation is probably single most important determinant of portfolio
performance
The Investment Process pt2 •Security Selection- choice of specific securities within each asset class
•Security Analysis- the valuation of particular securities
Stuvia 2026-2027 | Latest Version
, Investments Chapters 1-4 - Exam Questions & Verified Answers
Efficient Markets •Securities should be neither underpriced nor overpriced on average
•Security prices should reflect all information available to investors
•Active versus Passive management
Active vs Passive Investing •Active management (also called active investing) refers to a portfolio management
strategy where the manager makes specific investments with the goal of
outperforming an investment benchmark index.
•Passive management (also called passive investing) is an investing strategy that
tracks a market-weighted index or portfolio.
Players in the Financial Markets •Firms- demanders of capital
•Households- suppliers of capital
•Governments- borrower and lender
Financial Intermediaries •Bring together suppliers of capital (investors) and demanders of capital
(corporations and governments)
•Provide SCALE and EFFICIENCY
•Distinguished from other businesses in that there ASSETS AND LIABILITIES are
primarily financial assets
Financial Intermediaries pt 2 •There are many different types of Financial Intermediaries
•Banks (credit unions etc)- take in deposits and make loans
•Investment banks-underwrite securities (debt and equity) and sell to
investors•Investment companies -pool and manage money of many investors-Ie
mutual funds, hedge funds, pension funds
Financial Intermediaries pt3 •Insurance companies•Venture capital- invest in start up companies that ARE NOT
YET PUBLIC
.•Private Equity-typically invest in established companies that need restructured
Wall Street- Structure •Not a homogeneous creature
•Buy Side v Sell Side
Sell Side and Buy Side Sell Side
Investment BanksCorporate BanksCommercial BanksBrokerage Firms
Buy SideAsset
Mangers (ie mutual funds, 3rd party managers)Hedge FundsPension FundsRetail
Investors
Sell Side vs. Buy Side •The SELL SIDE of Wall Street includes investment bankers who serve as
intermediaries between issuers of securities and the investing public, analysts who
perform stock research and make ratings, and the market makers who provide
liquidity in the market.
Sell Side Firms -Goldman Sach-BofAMerrill Lynch-JP Morgan-Morgan Stanley (bulge brackets)
--Key Bank-Raymond James-Robert W Baird(regional)
Buy Side - The side of Wall Street comprising the investing institutions such as mutual funds,
pension funds, hedge funds and insurance companies that buy securities and
assets for their own or their clients' accounts
•Types of Buy Side Firms: -Asset Managers-Hedge Funds-Pension Funds-Insurance Companies-
Endowments-Private Equity
Buy Side Firms -T Rowe Price-Fidelity-Wellington-Voya-STRS-PERS
Stuvia 2026-2027 | Latest Version
How much is the US stock market up/down so far in 2020? ^7%
General info on stocks Stocks are forward looking
investing is about uncertainty
Knowledge and process can reduce uncertainty( and common sense)
If you are certain of an investment dont do it, so is everyone else.
What is the most FREQUENTLY used term to describe the Uncertainty
OUTLOOK for the financial markets?
What is an Investment? The commitment of current resources in the expectation of deriving greater return in
the future
Real Assets Used to produce goods and services: Property, plants and equipment, human
capital, etc.
Financial Assets Claims on real assets or claims on real-asset income
Real Assets- generate net income to the •When you buy securities (stocks or bonds) the issuing company uses the money to
economy•Financial assets-define the allocation of income pay for real assets
or wealth among investors •You have a claim on the income from those assets
•Ie STARBUCKS
Major Classes of Financial Assets or Securities Fixed-income (debt) securities•Promises a stream of income
•Corporate bonds, money market instruments, Bank certificates of deposit, treasury
securities commercial paper, etc.
•Preferred stock
•Common stock (equity)
•Ownership stake in entity, residual cash flow
•Derivative securities
•Contract, value derived from underlying market condition
Financial Markets and the Economy •Securities markets play important role in facilitating the deployment of capital to its
most productive use.
•Informational Role of Financial Markets-direct capital to firms with greatest
perceived potential
•Consumption Timing-acts as a store of wealth
•Allocation of Risk- allows efficient matching of risk seekers and risk takers
•Separation of Ownership and Management- allows companies to build scale
•Corporate Governance and Ethics-markets require TRUST to function
The Investment Process •Portfolio- a collection of investment assets-Stocks, bonds, real estate, commodities
etc.
•Two decisions are made to build an investment portfolio-Asset Allocation-Security
Selection
Investment Process •Asset Allocation- the choice among broad array of asset classes -Stocks, bonds,
real estate, commodities, alternative assets etc
Asset Allocation is probably single most important determinant of portfolio
performance
The Investment Process pt2 •Security Selection- choice of specific securities within each asset class
•Security Analysis- the valuation of particular securities
Stuvia 2026-2027 | Latest Version
, Investments Chapters 1-4 - Exam Questions & Verified Answers
Efficient Markets •Securities should be neither underpriced nor overpriced on average
•Security prices should reflect all information available to investors
•Active versus Passive management
Active vs Passive Investing •Active management (also called active investing) refers to a portfolio management
strategy where the manager makes specific investments with the goal of
outperforming an investment benchmark index.
•Passive management (also called passive investing) is an investing strategy that
tracks a market-weighted index or portfolio.
Players in the Financial Markets •Firms- demanders of capital
•Households- suppliers of capital
•Governments- borrower and lender
Financial Intermediaries •Bring together suppliers of capital (investors) and demanders of capital
(corporations and governments)
•Provide SCALE and EFFICIENCY
•Distinguished from other businesses in that there ASSETS AND LIABILITIES are
primarily financial assets
Financial Intermediaries pt 2 •There are many different types of Financial Intermediaries
•Banks (credit unions etc)- take in deposits and make loans
•Investment banks-underwrite securities (debt and equity) and sell to
investors•Investment companies -pool and manage money of many investors-Ie
mutual funds, hedge funds, pension funds
Financial Intermediaries pt3 •Insurance companies•Venture capital- invest in start up companies that ARE NOT
YET PUBLIC
.•Private Equity-typically invest in established companies that need restructured
Wall Street- Structure •Not a homogeneous creature
•Buy Side v Sell Side
Sell Side and Buy Side Sell Side
Investment BanksCorporate BanksCommercial BanksBrokerage Firms
Buy SideAsset
Mangers (ie mutual funds, 3rd party managers)Hedge FundsPension FundsRetail
Investors
Sell Side vs. Buy Side •The SELL SIDE of Wall Street includes investment bankers who serve as
intermediaries between issuers of securities and the investing public, analysts who
perform stock research and make ratings, and the market makers who provide
liquidity in the market.
Sell Side Firms -Goldman Sach-BofAMerrill Lynch-JP Morgan-Morgan Stanley (bulge brackets)
--Key Bank-Raymond James-Robert W Baird(regional)
Buy Side - The side of Wall Street comprising the investing institutions such as mutual funds,
pension funds, hedge funds and insurance companies that buy securities and
assets for their own or their clients' accounts
•Types of Buy Side Firms: -Asset Managers-Hedge Funds-Pension Funds-Insurance Companies-
Endowments-Private Equity
Buy Side Firms -T Rowe Price-Fidelity-Wellington-Voya-STRS-PERS
Stuvia 2026-2027 | Latest Version
