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TTU / Finance / FIN 3324 / finance ttu

finance ttu

finance ttu

Description

School: Texas Tech University
Department: Finance
Course: Investments
Term: Spring 2017
Tags: investmetments, finance, TTU, 3324, and FIN3324
Cost: Free
Name: Chapter 1 Notes Fin 3324
Description: Here are notes from financial investments (fin 3324) chapter one from the class lectures/slide shows along side additional information from the textbook: Essentials of Investments 10th edition
Uploaded: 02/14/2017
2 Pages 132 Views 12 Unlocks
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Financial Investments 3324  Part 1 Notes:  Investment: The current commitment of money or other resources with an expectation of future benefits. A  reduction of current consumption with an expectations of greater consumption in the future  Real Asset: Used to produce goods and services  Examples: Real Estate, consumer durables  Financial Asset: Claims on real assets or the income generated by them   Examples: Deposits, life insurance reserves, pension reserves, corporate equity, mutual funds, debt  securities (bonds)  Domestic Net worth Includes:  1. commercial real estate  2. residential real estate  3. equity and intellectual property  4. inventories  5. consumer durables  Household wealth Includes:  1. bank accounts  2. corporate stock  3. bonds (debt securities)  Examples questions answered:  1. Do Stock prices play a major role in the allocation of capital in the market economies?  2. What should someone do in order to avoid reduction of purchasing power during low-earning periods in life?  3. True or False: virtually all real assets involve some risk?  4. What act was passed by congress in 2002 in response to all the financial ethic scandals?  Answers:  1. Yes, stock prices do play a major role in the allocation of capital in the market economies  2. During high-earning periods invest in savings/bonds  3. True  4. Sarbares-Oxley Act  What are Financial Assets?  - claims on real assets or claims on the income generated by them  - all financial assets (owner of the claim-saver) are offset by financial liabilities (issuer of the claim-borrower)  Types of Financial Assets:  1. Fixed income (debt)- securities, money market investment, CD, T-Bills Bonds, and preferred stock  2. Common Stock (equity): residual cashflow and partial ownership in the company  3. Derivative Securities: contract from an underlying market condition  • Security Selection= the act of selecting and choosing each asset class (ex: technology/retail)  • Security Analysis= the act of analyzing the values of securities  Investors should consider the following when forming a portfolio:  1. Risk allocation: adjusting the risk and risk free assets  1. Investing in Bond (less risky) or stocks (more risky)  2. Bank CD (less risky) or Company Bond (more risky)  Risk and Return trade off: Risk and return have a positive relationship, the higher the risk the higher the return,  a stock has a higher return than a bond or bank CD but much higher risk  1 of 2• Stocks have an average return of 12%. In history the lowest return was in 1931 at -46% then in history the  highest rate of return just a few years later in 1933 was 55% return.  • Bonds on the other hand have an average rate of return less than 6%, however, they have never dropped more  than 13% in value in any year in history. Much less risky than stocks.  • Diversification (creating a very diversified portfolio in financial asset types and security categories) in the risk  return trade off will reduce risk.  Modern Portfolio Theory is the framework for forming portfolios:  - It identifies optimal portfolios weights  - It Identifies the combination of risky assets and less risky or risk free assets like T-Bills (diversification)  - It takes investors risk preferences into account  • Securities should NOT be under or over priced  • Securities price should reflect ALL information available to investors  Investment Management Styles: Active vs. Passive  

Active Management Passive Management Should be used when markets  are: Inefficient Efficient Security Selection process: Actively seeking securities  below market value no attempt to find below market  securities Asset allocation Timing: Tries to anticipate market timing no attempt to time the market Example strategies: Value and growth security  selection strategies Indexing, and constructing an  efficient portfolio


What are Financial Assets?




What act was passed by congress in 2002 in response to all the financial ethic scandals?




What should someone do in order to avoid reduction of purchasing power during low-earning periods in life?



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Players in the financial market:  1. Business firms (new borrowers- issuers)  2. Households (net savers-investors)  3. Governments (can be a saver or a borrower)  4. Financial Intermediaries (the connectors between borrowers and savers)  - Investment Companies: Specialize in primary market transactions  - Commercial Banks  - Insurance companies  - Pension funds (retirement funds)  - Hedge funds (only for the very wealthy)    Primary Market:  - Newly issued securities (IPO’s)  - Investment Companies usually underwrite the issues  Secondary Market: pre-existing securities traded among investors (NYSE)  Venture Capital: investment to finance NEW firms  Private Equity: Investment in a company NOT traded on the market  2 of 2
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