chapters 1,2,3,4,5,6 exam review notes

Real assets

Used to produce goods and services, such as property, plants and equipment, and human capital.

Financial assets

Claims on real assets or claims on real-asset income.

Informational role of financial markets

Refers to the ability of market prices to reflect the fair value estimate of a security’s expected future risky cash flows.

Consumption timing

Shifting consumption through time by investing surplus once current basic needs are met.

Risk allocation

The ability for investors to choose their desired level of risk, such as bonds versus stocks.

Risk-and-return trade-off

The balance between the potential risk and potential return of an investment.

Separation of ownership and management

Large firms require separate principals (owners) and agents (managers) to operate.

Corporate governance

The system of rules and practices that control and direct a company, requiring trust to operate efficiently.

Governance and ethics failures

Failures that can cost companies billions, eroding public support and confidence.

Accounting scandals

High-profile failures in corporate governance, such as Enron and WorldCom.

Investment process

The method of allocating assets and selecting securities within asset classes to determine a portfolio’s return.

Asset allocation

The percentage of a fund invested in different asset classes, such as stocks, bonds, and alternatives.

Security selection and analysis

The process of choosing specific securities within an asset class.