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

chapter 1

real versus financial assets

• real assets: used to produce goods and services: property, plants and equipment, human capital, etc.

• finanical assets: claims on real assets or claims on real-asset income
  

financial markets and the economy

• informational role of financial markets

  • do market prices equal the fiar value estimate of a security’s expected future risky cash flows?

  • can we rely in markets to allocate capital to the best uses?

    • other mechanisms to allocate capital?

• consumption timing

  • consumption smoothes over time

  • when current basic needs are met, shift consumption through time by investing surplus

• risk allocation

  • investors can choose desired risk level

    • bond vs. stock of company

    • bank CD vs. company bond

    • risk-and-return trade-off

• seperation of ownership and management

  • large sixe firms requires seperate prinicipals and agents

• corporate governance and corporate ethics

  • businesses and markets require trust to operate efficiently

    • without trust additional laws and regulations are required

    • laws and regulations are costly

  • governance and ethics failures cost the company billion, if not trillions

    • eroding public support and confidence

  • accounting scandals: Enron, WorldCom, Rite-Aid, HealthSouth, Global Crossing, Qwest

  • misleading research reports: Citicorp, Merril Lynch, others

  • auditors: watchdogs or consultants?: Arthur Andersen and Enron

the investment process

• asset allocation

  • primary determinant of a portfolio’s retunr

  • percentage of fund in asset classes

    • stocks 60%

    • bonds 30%

    • alternative assets 6%

    • money market securities 4%

  • security selection and analysis

    • choosing specific securities within asset class