FIN3200 Investment Assets, Markets, and Fund Management Concepts

Common asset classes ranked by risk

Cryptocurrencies (very high) → Commodities, Emerging Market Equities, Individual Stocks, High-Yield Bonds (high) → Real Estate (mod-high) → Corporate Bonds, Mutual Funds/ETFs (moderate) → Gov't Bonds, Precious Metals (low-mod) → Investment-Grade Bonds (low) → Cash, CDs, Savings Accounts (very low)

Difference between stocks and bonds

Stocks represent ownership, residual claim, potential dividends, higher risk. Bonds represent debt, fixed payments, priority claim over equity.

Money market instruments

Short-term, highly liquid, low-risk securities such as T-bills, CDs, Commercial Paper, Repos, Bankers' Acceptances.

Special about municipal bonds

Interest is often exempt from federal (and sometimes state/local) taxes, making them attractive to investors in higher tax brackets.

Difference between options and futures contracts

Options give the right (not obligation) to buy/sell at a set price; Futures are an obligation to buy/sell at a set price/date.

Holding period return (HPR)

The total return from an investment over a given period, including price changes and income (dividends/interest).

Difference between arithmetic and geometric average return

Arithmetic is the simple average of returns; Geometric accounts for compounding over time.

Difference between APR and EAR

APR is the simple annualized rate; EAR accounts for compounding and reflects true growth of investment.

Investment risk

The uncertainty of returns or potential financial loss; measured by variance, standard deviation, or Value-at-Risk.

Risk premium

The extra return expected from a risky asset above the risk-free rate.

Sharpe Ratio

The risk-adjusted return of a portfolio; higher Sharpe means better reward per unit of risk.

Primary market vs secondary market

Primary market is for new securities issued; Secondary market is for trading existing securities.

Four market types

Direct search, Brokered, Dealer, and Auction markets.

Difference between market order and limit order

Market order executes immediately at best available price; Limit order executes only at a specified price or better.

Difference between broker and dealer

Broker acts on behalf of clients and earns commission; Dealer trades for own account and earns bid-ask spread.

Buying on margin

Borrowing part of the purchase price of securities from a broker, using the securities as collateral.

Short selling

Selling borrowed stock in hopes of buying it back later at a lower price to profit from a decline.

Investment company

A financial intermediary that pools funds from investors to invest in securities, e.g., mutual funds, REITs, hedge funds.

Difference between open-end and closed-end funds

Open-end funds issue/redeem shares at NAV; Closed-end funds trade on exchanges, often at premium/discount to NAV.

Main costs of investing in mutual funds

Annual fees (expense ratio, 12b-1 fees), one-time sales loads (front- or back-end), and indirect costs like soft dollars.

Diversification

Spreading investments across multiple assets to reduce risk exposure.

Professional management in funds

Fund managers make investment decisions on behalf of investors, providing expertise and lower transaction costs.