Finance 327 Study Guide
I. Topic 1. Introduction
1. Explain the difference b/w financial assets and real assets. Real Assets: (37%, 1%) Used to produce goods and services: property, plant & equipment, human capital, consumer durable, land, building etc (Material wealth of society: productive capacity, real asset) Financial Assets (debt, equity and derivative): Claims on real assets or claims on asset income. The largest financial asset of U.S. households is: pension reserve (real assets generate net income to the economy and financial assets define allocation of income among investors)
NOT FI (IBM, brokerage) Lehman brother bankruptcy 2008
2. What’s the investment process? Which decision plays a determinant role? Process: asset allocation -> security selection & analysis (TOP-DOWN method). Asset allocation (how much do I have to put in each category) 90 % of the differences in your portfolio is related to asset allocation. Choosing the percentage of funds in asset classes. Security selection & analysis: Choosing specific securities in an asset class. The asset allocation decision is the primary determinant of a portfolio’s return
3. Describe the main players in the financial market(capital resource primary allocated): Business Firms, Households, Governments – can be both borrowers and savers, Financial Intermediaries “Connectors of borrowers and lenders” (Commercial Banks, Investment companies, Insurance companies, Pension funds, Hedge funds), Investment Banks (Firms that specialize in the sale of new securities to the public, typically by underwriting the issue; Commercial and investment banks were separated by law from 1933 to 1999; Post 1999 large investment banks operated independently from commercial banks; In September 2008 end era of “wall street”) (NOT allow most participants to routinely earn high returns with low risk)
4. What’s securitization? (home mortgage) Understand what happened to home mortgage securitization in the recent financial crisis. ADRs
1. Explain the difference b/w financial assets and real assets. Real Assets: (37%, 1%) Used to produce goods and services: property, plant & equipment, human capital, consumer durable, land, building etc (Material wealth of society: productive capacity, real asset) Financial Assets (debt, equity and derivative): Claims on real assets or claims on asset income. The largest financial asset of U.S. households is: pension reserve (real assets generate net income to the economy and financial assets define allocation of income among investors)
NOT FI (IBM, brokerage) Lehman brother bankruptcy 2008
2. What’s the investment process? Which decision plays a determinant role? Process: asset allocation -> security selection & analysis (TOP-DOWN method). Asset allocation (how much do I have to put in each category) 90 % of the differences in your portfolio is related to asset allocation. Choosing the percentage of funds in asset classes. Security selection & analysis: Choosing specific securities in an asset class. The asset allocation decision is the primary determinant of a portfolio’s return
3. Describe the main players in the financial market(capital resource primary allocated): Business Firms, Households, Governments – can be both borrowers and savers, Financial Intermediaries “Connectors of borrowers and lenders” (Commercial Banks, Investment companies, Insurance companies, Pension funds, Hedge funds), Investment Banks (Firms that specialize in the sale of new securities to the public, typically by underwriting the issue; Commercial and investment banks were separated by law from 1933 to 1999; Post 1999 large investment banks operated independently from commercial banks; In September 2008 end era of “wall street”) (NOT allow most participants to routinely earn high returns with low risk)
4. What’s securitization? (home mortgage) Understand what happened to home mortgage securitization in the recent financial crisis. ADRs