Investments Exam 1 Book

Topics: Investment, Mutual fund, Financial markets Pages: 6 (1773 words) Published: April 14, 2015
Investments Study Guide

BOOK

Review Figures: 1.1, 1.2, 1.3, 3.7, 5.3, 5.4, 6.1, 7.2, 8.1, 8.3, 8.4, 8.5

Chapter One
Real Assets- assets used to produce goods and services (land, buildings, etc)

Financial Assets- claims on real assets of the income generated (stocks, bonds)

Fixed Income (Debt) Securities- pay a specified cash flow over a specific period of time (CDs, Treasury Bills, Treasury securities)

Equity- ownership share in a corporation (pay dividends) depend on success of company

Derivatives- securities providing payoffs that depend on values of other assets

Separation of Management and Ownership- corporations of large scale cannot be owner-operated firms; sell stock to shareholders and hire other people to manage the company

Risk Return Trade-off- assets with higher expected returns entail greater risk

Passive Management- buying and holding a diversified portfolio without attempting to identify mispriced securities; saves money

Active management- attempting to identify mispriced securities or to forecast broad market trends- if markets where perfectly efficient this would be unnecessary- however in markets profit opportunities exist for investors who really look into mispriced securities; more money

Financial intermediaries- institutions that connect borrowers and lenders by accepting funds from lenders and loaning funds to borrowers; these include banks, investment companies, insurance companies, & credit unions; both assets and liabilities are largely financial compared to other companies

Primary Market- market in which new issues of securities are offered to the public; banks for primary markets are underwriters; IPOs

Secondary Market- previously issued securities are traded among investors

Venture Capital- Money invested to finance a new firm

Private Equity- investments in companies not traded on stock exchange

Securitization- packaging illiquid loans into standardized securities backed by those loans to create liquid assets that can then be traded like any other security

Systemic Risk- risk of breakdown in the financial system, particularly due to spillover effects from one market into another; i.e. if banks have limited capital and are afraid to further losses, they wont lend to customers such as small firms creating funding problems for these firms

Chapter Two
Indexes- gives benchmark to compare performance and give you target to use for funds

Dow Jones-index with average prices of 30 large, blue chip stocks; price weighted average- computed by adding the prices of the stocks and dividing by a divisor

S&P 500- more broadly based index of 500 firms; market value-weighted index- index return equals the weighted average of the returns of each component security, with weights proportional to outstanding market value

Equally weighted index- index computed from a simple average of returns; small cap stocks have more weight

Bond Market Indexes- measures performance on various categories of bonds; however true rates of return are hard to compute because bonds trade infrequently and hard to get reliable prices

Treasury Bills- short-term gov’t securities issued at a discount from face value, returning face amount at maturity

Derivatives:
Call Options: right to buy an asset at a specified price on or before a specified expiration date- beneficial if the price of the asset exceeds the exercise price
Put Options: right to sell an asset at a specified price on or before a specifies expiration date- profits increase when value of the asset falls
Futures: Obliges traders to purchase or sell an asset at an agreed upon price at a specified future date

Chapter Three
Markets
Direct Search: least organized; buyers and sellers seek each other out directly (i.e. Craigslist)
Brokered Markets: market where search services are offered for buyers and sellers for a good that is actively traded (i.e. Real estate)
Dealer Markets: traders...
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