Investment Principles - Summer 2026

This set of vocabulary flashcards covers introductory investment principles, asset classes, and financial instruments based on the Summer 2026 lecture series.

Real Assets

Assets used to produce goods and services, such as land, buildings, and knowledge, which determine the productive capacity and net income of the economy.

Financial Assets

Claims on the income produced by real assets, such as stocks and bonds, which do not contribute directly to productive capacity but finance real assets.

Fixed-Income

Debt instruments that promise a fixed stream of income or a stream determined by a specific formula, such as a corporate bond.

Equity

An ownership share in a corporation, providing a residual claim on assets and income.

Derivatives

Securities, such as options or futures, whose payoffs are determined by the prices of other underlying assets like stocks, interest rates, or exchange rates.

Agency Problems

Conflicts of interest that arise when managers pursue their own goals instead of maximizing the firm's value.

Asset Allocation

The selection and proportion of investments among broad asset classes such as stocks, bonds, and real estate.

Security Selection

The choice of specific securities within a particular asset class.

Security Analysis

The valuation of individual securities to find those with superior return-to-risk prospects.

Top-down Approach

An investment process that begins with asset allocation and is followed by security selection.

Bottom-up Approach

An investment process focused on finding attractively priced securities regardless of their asset class.

Efficient Markets

The hypothesis that security prices fully and quickly reflect all available information, implying there are rarely bargains in the market.

Passive Management

Holding a highly diversified portfolio without attempting to find undervalued securities or time the market.

Active Management

The strategy of seeking mispriced securities or timing the market to buy low and sell high.

Financial Intermediaries

Institutions such as banks, insurance companies, and mutual funds that bring suppliers of capital together with demanders of capital.

Primary Market

The market where new issues of securities are offered to the public for the first time, often involving investment bankers.

Secondary Market

The market where investors trade previously issued securities amongst themselves.

Venture Capital (VC)

Equity investment in new, not yet publicly traded firms, where investors often take an active management role.

Private Equity

Investments in companies whose shares are not traded on a public stock market.

Fintech

The application of technology to financial markets, encompassing innovations like peer-to-peer lending and blockchain.

Dodd-Frank Reform Act

A 2010 U.S. law aimed at mitigating systemic risk through stricter rules for bank capital, liquidity, and increased transparency in derivatives.

Money Market

A subsector of the fixed-income market consisting of short-term (1 year or less), liquid, and low-risk debt securities often termed 'cash equivalents'.

Treasury Bills (T-bills)

Short-dated government debt sold at a discount from face value, considered the most marketable money market instrument.

Bid-Ask Spread

The difference between the bid price (the price a dealer receives from an investor) and the ask price (the price an investor pays a dealer).

Commercial Paper

Short-term unsecured debt notes issued by well-known, large companies.

Bankers’ Acceptance

An order to a bank by a customer to pay a sum of money on a future date, frequently used in foreign trade and second only to T-bills in safety.

Eurodollars

U.S. Dollar-denominated time deposits kept in banks outside of the United States.

Repurchase Agreements (Repos)

Short-term, often overnight, borrowing transactions backed by government securities as collateral.

Bond-Equivalent Yield

The Canadian standard for annualizing T-bill yields, calculated as $r_{BEY} = \frac{1000 - P}{P} \times \frac{365}{n}$.

Bank-Discount Method

The U.S. method for quoting T-bill yields, calculated as $d = \frac{1000 - P}{1000} \times \frac{360}{n}$.

Effective Annual Yield (EAY)

A yield calculation that accounts for compounding over an $n$-day period: $r_{EAY} = \text{EAY} = \frac{F}{P}^{\frac{365}{n}} - 1$.

Callable Bonds

Bonds that grant the issuer the right to repurchase the bond from holders at a set price before maturity.

Convertible Bonds

Bonds that grant the holder the option to exchange the bond for a predetermined number of shares of the company's stock.

Market-Value-Weighted Index

An index where security weights are based on their total market capitalization, meaning larger firms have a greater impact.

Price-Weighted Index

An index calculated by summing the prices of individual shares and dividing by a divisor, so higher-priced stocks have more influence.

Futures Contract

An obligation to purchase or sell an asset at an agreed-upon price on a specified future date.

Call Option

The right, but not the obligation, to purchase an asset at a specific exercise price on or before an expiration date.

Put Option

The right, but not the obligation, to sell an asset at a specific exercise price on or before an expiration date.

Contango

A market condition where the future prices of a contract are higher than the current spot prices.

Backwardation

A market condition where the future price of a contract is lower than the current spot price.