1. Overview

Time Value of Money

The principle that monetary values change over time due to potential earning capacity.

Present Value (PV)

The current value of a future sum of money, discounted at a particular interest rate.

Real Assets

Tangible assets that are used to produce goods and services, such as land and equipment.

Financial Assets

Claims on cash flows from real assets; they do not produce physical goods or services.

Stocks

Financial assets that represent ownership in a company and a claim on its cash flows.

Bonds

Debt instruments where an issuer promises to pay back a fixed interest and principal amount at maturity.

Derivatives

Financial contracts whose value is dependent on the price of other underlying assets.

Capital Asset Pricing Model (CAPM)

A model that determines the expected return of an asset based on its beta.

Risk vs. Return

The positive relationship between the potential risk taken in an investment and the potential return.

Asset Allocation

The process of distributing investments across various asset classes to optimize risk and return.

Active vs. Passive Investment

Active investment involves ongoing buying and selling, while passive investment involves a buy-and-hold strategy.

Fama-French 3-factor model

A financial model incorporating size and value factors along with market risk to explain asset returns.

Financial Intermediaries

Institutions such as banks and insurance companies that facilitate the flow of funds in financial markets.

Fixed Income Assets

Securities that provide returns in the form of fixed periodic payments and include bonds and notes.

Equity Securities

Financial assets that represent ownership in a firm, including common and preferred stock.

Global Market Portfolio

A theoretical portfolio that includes all available investments in the global market.