CHAPTER 1 – BACKGROUND AND ISSUES
1. Introduction
2. Basis concepts
a. Two basic concepts: return & risk
i. Risk
ii. Return
b. Trade-off between risk and return
i. The historical record: 1979 – 2016
ii. Long-term realized risk-return trade-off
iii. The historical record: 1999 – 2011
iv. Shorter-term realized risk-return trade-off
v. Expected VS realized risk-return trade-off
c. Efficient markets
d. Pricing of assets
e. Diversification
3. Types of investment
a. Real assets VS financial assets & direct VS indirect investments
i. Foreign stock market
b. Financial assets
i. Fixed-income (debt securities)
ii. Common stock (equity)
iii. Derivative securities
4. The investment process
a. 5 steps
i. Set investment policy
ii. Perform security analysis & valuation
iii. Construct a portfolio
iv. Revise a portfolio
v. Evaluate performance
b. Investment decisions
i. 2 steps
1. Asset allocation
2. Security selection
ii. Asset allocation
1. Investment horizon
2. Risk tolerance
iii. Course philosophy: top-down approach
c. Investment management
d. Efficient markets and investment strategy
e. Factors affecting investment decisions
i. The great unknown
ii. Global investment area
1
,5. Players in the financial markets
a. Financial intermediaries
b. Investment bankers
c. Venture capital & private equity
d. Types of investors
i. Retail investors
ii. Institutional investors
6. Role of financial markets
a. Channel funds (from saver to borrowers)
b. Allow consumption timing
c. Help allocate cash (to where it is most productive)
d. Help lower the cost of cash
7. Financial markets & the economy
a. The informational role of financial markets
b. Allocation of risk
c. Separation of ownership & management
d. Corporate governance & corporate ethics
i. 2000 – 2002: scandals
ii. 2002: Sarbanes-Oxley Act
2
,CHAPTER 2 – ASSET CLASSES & FINANCIAL INSTRUMENTS
1. Review
2. Agenda
3. Organizing financial assets
a. Saving options of households
i. Liabilities of traditional intermediaries
ii. Hold securities directly
iii. Hold securities indirectly
4. Types of assets
a. Short-term money market (low risk & return)
b. Long-term capital market (high risk & return)
5. The money market
a. Treasury bills
b. Certificates of deposit
c. Commercial paper
d. Banker’s acceptances
e. Eurodollars
f. Repos & reverses
i. Repurchase agreements (repos)
ii. Repo
iii. Reverse repo
g. Broker’s calls
h. Federal funds
i. The LIBOR market
j. Yields on money market instruments
3
, 6. The bond market
a. Treasury notes and bonds
i. T-notes
ii. T-bonds
b. Inflation-protected treasury bonds
i. TIPS
c. Federal agency debt
d. International bonds
i. Eurodollar bond (GB in $)
ii. Euroyen bonds (JAP in ¥)
iii. Yankee bond (US in $)
iv. Samurai bond (JAP in ¥)
e. Municipal bonds
i. General obligation bonds
ii. Revenue bonds
iii. Industrial development bonds
iv. Taxable bonds
v. Tax-exempt bonds
f. Corporate bonds
i. Secured bonds
ii. Unsecured bonds (debentures)
iii. Subordinated debentures
iv. Callable bonds
v. Convertible bonds
g. Mortgage & asset-backed securities
i. Conforming mortgages
ii. Subprime mortgages
h. Bond ratings
7. Equity securities
a. Common stock (equity securities) as ownership shares
b. Characteristics of common stock
i. Residual claims
1. Going concern
2. Book value
3. Market value
ii. Limited liability
iii. Cash dividends
1. Dividend yield
2. Payout ratio
iv. Stock dividend
v. Stock split
vi. P/E ratio
c. Stock market listings
d. Preferred stock
e. Depositary receipts
4
1. Introduction
2. Basis concepts
a. Two basic concepts: return & risk
i. Risk
ii. Return
b. Trade-off between risk and return
i. The historical record: 1979 – 2016
ii. Long-term realized risk-return trade-off
iii. The historical record: 1999 – 2011
iv. Shorter-term realized risk-return trade-off
v. Expected VS realized risk-return trade-off
c. Efficient markets
d. Pricing of assets
e. Diversification
3. Types of investment
a. Real assets VS financial assets & direct VS indirect investments
i. Foreign stock market
b. Financial assets
i. Fixed-income (debt securities)
ii. Common stock (equity)
iii. Derivative securities
4. The investment process
a. 5 steps
i. Set investment policy
ii. Perform security analysis & valuation
iii. Construct a portfolio
iv. Revise a portfolio
v. Evaluate performance
b. Investment decisions
i. 2 steps
1. Asset allocation
2. Security selection
ii. Asset allocation
1. Investment horizon
2. Risk tolerance
iii. Course philosophy: top-down approach
c. Investment management
d. Efficient markets and investment strategy
e. Factors affecting investment decisions
i. The great unknown
ii. Global investment area
1
,5. Players in the financial markets
a. Financial intermediaries
b. Investment bankers
c. Venture capital & private equity
d. Types of investors
i. Retail investors
ii. Institutional investors
6. Role of financial markets
a. Channel funds (from saver to borrowers)
b. Allow consumption timing
c. Help allocate cash (to where it is most productive)
d. Help lower the cost of cash
7. Financial markets & the economy
a. The informational role of financial markets
b. Allocation of risk
c. Separation of ownership & management
d. Corporate governance & corporate ethics
i. 2000 – 2002: scandals
ii. 2002: Sarbanes-Oxley Act
2
,CHAPTER 2 – ASSET CLASSES & FINANCIAL INSTRUMENTS
1. Review
2. Agenda
3. Organizing financial assets
a. Saving options of households
i. Liabilities of traditional intermediaries
ii. Hold securities directly
iii. Hold securities indirectly
4. Types of assets
a. Short-term money market (low risk & return)
b. Long-term capital market (high risk & return)
5. The money market
a. Treasury bills
b. Certificates of deposit
c. Commercial paper
d. Banker’s acceptances
e. Eurodollars
f. Repos & reverses
i. Repurchase agreements (repos)
ii. Repo
iii. Reverse repo
g. Broker’s calls
h. Federal funds
i. The LIBOR market
j. Yields on money market instruments
3
, 6. The bond market
a. Treasury notes and bonds
i. T-notes
ii. T-bonds
b. Inflation-protected treasury bonds
i. TIPS
c. Federal agency debt
d. International bonds
i. Eurodollar bond (GB in $)
ii. Euroyen bonds (JAP in ¥)
iii. Yankee bond (US in $)
iv. Samurai bond (JAP in ¥)
e. Municipal bonds
i. General obligation bonds
ii. Revenue bonds
iii. Industrial development bonds
iv. Taxable bonds
v. Tax-exempt bonds
f. Corporate bonds
i. Secured bonds
ii. Unsecured bonds (debentures)
iii. Subordinated debentures
iv. Callable bonds
v. Convertible bonds
g. Mortgage & asset-backed securities
i. Conforming mortgages
ii. Subprime mortgages
h. Bond ratings
7. Equity securities
a. Common stock (equity securities) as ownership shares
b. Characteristics of common stock
i. Residual claims
1. Going concern
2. Book value
3. Market value
ii. Limited liability
iii. Cash dividends
1. Dividend yield
2. Payout ratio
iv. Stock dividend
v. Stock split
vi. P/E ratio
c. Stock market listings
d. Preferred stock
e. Depositary receipts
4
