Concise summary of all lectures of Investment Analysis - MSc Finance - Tilburg University

Lecture 1: Contents
Investments & Financial Assets
 Essential nature of investment:
o Reduced current consumption
o Planned later consumption

 Real Assets
o Assets used to produce goods and services (Land, Buildings, Machines)

 Financial Assets
o Claims on real assets (Stocks, Bonds)
Financial Markets and the Economy
 Informational role of financial markets
o Financial markets play a central rol in the allocation of capital resources
 Consumption Timing
 Allocation of Risks
 Separation of Ownership and Management
o Agency issues (Corporate Governance and Corporate Ethics)
- Huge accounting scandals in the past (Enron, Royal Ahold, Bernard L.
Madoff Investment Securities LLC, Libor rate scandal)
- Auditing Scandals
- Analyst scandals: Favorable stock analysis in exchange fore for the
promise of future investment banking business
- Sarbanes-Oxley Act/Code Tabaksblat (Netherlands) – Tighten the rules
of corporate governance
Consumption Timing – Example
 There are two periods and in each period I have an
income of $10,000, saving and borrowing is
possible at an interest rate of 5%

1. Consume $10,000 in both periods, consume
$10,000 in both periods

2. Save all money of the first period and
consume everything in the second period,
consume $0 in the first period and $10,000 x
1.05 + $10,000 = $20,500 in the second period


3. Consume everything now, consume $10,000 +
$10,000 /1.05 = $19,524 in the first period and
consume $0 in the second period

,Indifference Curves
 The investor is indifferenct whether he obtains point A,
B or C along curve I1

 All choices along I1 will be preferred to choices on I2

 If you have not much to consume in period 1, extra
period 1 consumption requires larger efforts of period 2
consumption.

 The steepness of the indifference curve for a given
person depends on the personal preferences – such as
risk-aversion
The Investment Process
 Portfolio: Collection of Invesment Assets
o Asset allocation (choice among broad range of asset classes)
o Security selection (choice of securities within each asset class)

 Security Analysis: valuation
o Top-down – asset allocation – pick securities
o Bottom-up – attractively priced securities, without much concern for asset
allocation
Markets are Competitive
 Risk-Return Trade-Off
o Assets are priced in line with risks

 Active Management
o Finding mispriced securities
o Timing the market

 Passive Management
o No attempt to find undervalued securities
o No attempt to time the market
o Holding a highly diversified portfolio
o Trading costs/management fees are much lower

,The players
 Firms – net borrowers
 Households – net savers
 Governments – can be both borrowers and savers
 Financial intermediaries
o Investment companies
o Pension funds
o Banks
o Insurance companies
 Invesment Banks
o Perform specialized services for businesses, for example IPO
o SEO/SPO
o Handles the marketing of securities in the primary market
 Venture Capital – active role in the management of start-ups
 Private Equity – investment in not publicly traded firms
Financial Markets
 Money Markets – short term, liquid, low-risk
o T-Bills
o Certificates of Deposits
o Commercial paper
o Bankers’ acceptance
o Eurodollars
o Repurchase agreements
o Federal Funds
o Brokers’ Calls
o LIBOR and its replacements
o Bond Market – Longer term borrowing or debt instruments
 Treasury notes and bonds
 Municipal bonds
 Corporate bonds
 Mortgage securities
 Federal agency debt
 Capital Markets – longer term, more risky
o Common stock
 Ownership share
 1 share 1 vote
 Board of directors, elected by shareholders (owners)
 Residual claim – last in line on assets and income
 Limited liability – max potential loss is original investment
 Dividend yield
 Capital gains

, o Preferred stock – features of equity and debt
 Fixed amount of income
 No voting power
 Obligation to pay interest, but not dividend
 Payments are treated as dividends, not tax-deductible for firm
o Derivative Assets – a claim whose value is contingent on the value of some
underlying asset
 Options (call/put)
 Right to buy or sell
 Exercised only when profitable
 Must be purchased
 Futures
 Obligation to make or take delivery
 Obligation to buy/sell at futures price
 Contracts are entered without costs


Lecture 2:
Chapter 3 How securities are traded
How firms issue securities
 Firms can issue securities by borrowing money or selling shares
o Primary market – new issue of securities
o Secondary market – trading existing securities on exchanges or OTC markets
 Both publicly listed firms and private corporations have shares, but the
first are traded publicly in markets, while the latter are held by a small
number of managers and investors
Publicly traded companies
 IPO
o Road shows
o Bookbuilding
o Underwriters bears price risk
 SEO
o Public offerings of stocks/bonds are marketed by underwriters