FIN 312: S01 Intro

Real Assets vs. Financial Assets

Are used to produce goods and services and determine productive capacity.

Financial Assets

Are claims on real assets.

Three Main Types of Financial Assets

Fixed-income securities, equity (common stock), and derivatives.

Fixed Income Securities

Promises a fixed stream of income determined by a specific formula (e.g., corporate bond)

Equity

Represents ownership shares in a corporation (e.g., common stock)

Derivatives

Provide payoffs that are determined by the prices of other underlying assets, such as stocks, exchange rates, or interest rates

Informational Role of Financial Markets

Stock prices largely reflect the collective judgment of market participants.

Consumption Timing of Financial Markets

Store wealth and transfer consumption to the future

What is the purpose of allocating risk in financial markets?

To provide investors with choices that fit their risk preference.

How does risk allocation benefit capital demanders?

It helps them get a fair deal in terms of risk and return.

Portfolio

Collection of investment assets

"Top-down" approach

Asset allocation → security selection

Ex. Stock --> TD stock

Bottom-Up Approach

finding attractively priced securities

Risk-return trade-off

Risk and expected return are positively correlated (Core of "Modern Portfolio Theory")

Efficient Markets traits

The prices of securities fully reflect available information. You should rarely expect to find bargains in the security markets.

Passive management

Holding a broadly diversified portfolio and not trying to beat the market. (extreme efficiency)

Active Management

Worth the cost only if markets are near-efficient rather than perfectly efficient. (Reality: near-efficiency motivates active portfolio management)

Firms

Net demanders of capital (net borrowers)

Households

Net suppliers of capital (net savers)

Financial intermediaries

Entities that connect capital suppliers and demanders by pooling and channeling funds, such as banks and insurance companies.

Investment Bankers

Financial intermediaries that underwrite new issues raise new capital for firms by selling newly issued securities to the public in the Primary Market

Private equity & Venture capital (VC)

○ invest in non public traded firms (private firms) at different stage

○ VC investors commonly take an active role in the management of

a start-up firm

Fintech

Digital wealth/financial service platform (Wealthsimple), Digital payment tech (Paypal, Apple pay), blockchain/DLT (cryptocurrency/crypto assets, etc.), etc.

Peer-to-Peer Lending

A decentralized network or system where participants (peers) connect and share resources directly with each other.

Government

○ Regulation

○ Can be borrowers or savers depending on fiscal status

Securitization

Pooling loans into standardized securities backed by those loans that trade like any other security.

Collateralized debt obligation (CDO)

Concentrates the credit risk of a bundle of loans on one class of investors by dividing the pool into senior and junior tranches.

Systemic risk

The risk of a breakdown in the financial system, driven by spillovers from one market into others.