Essentials of Investments: Chapter 1 - Investments - Background and Issues

Essentials of Investments: Chapter 1 - Investments - Background and Issues includes Investments & Financial Assets, The Investment Process, Active vs. Passive Management, Major Classes of Financial Assets or Securities.

1 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Chapter Investments - Background and Issues Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc All rights reserved 2 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Investments & Financial Assets • Essential nature of investment – Reduced current consumption – Planned later consumption • Real Assets – Assets used to produce goods and services • Financial Assets – Claims on real assets Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc All rights reserved 3 Bodie • Kane • Marcus Essentials of Investments Fourth Edition The Investment Process • • • • • Asset allocation Security selection Risk-return trade-off Market efficiency Active vs passive management Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc All rights reserved 4 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Active vs Passive Management Active Management • Finding undervalued securities • Timing the market Passive Management • No attempt to find undervalued securities • No attempt to time Holding an efficient portfolio Irwin / McGraw-Hill â 2001 The McGraw-Hill Companies, Inc All rights reserved 5 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Major Classes of Financial Assets or Securities • Debt – Money market instruments – Bonds • Common stock • Preferred stock • Derivative securities Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc All rights reserved 6 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Investments and Innovation Technology and Delivery of Service • Computer advancements • More complete and timely information Globalization • Domestic firms compete in global markets • Performance in regions depends on other regions • Causes additional elements of risk Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc All rights reserved 7 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Key Trends - Globalization International and Global Markets Continue Developing • Managing foreign exchange • Diversification to improve performance • Instruments and vehicles continue to develop • Information and analysis improves Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc All rights reserved 8 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Key Trends - Securitization Securitization & Credit Enhancement • Offers opportunities for investors and originators • Changes in financial institutions and regulation • Improvement in information capabilities • Credit enhancement and its role Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc All rights reserved 9 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Key Trends Financial Engineering Repackaging Services of Financial Intermediaries • Bundling and unbundling of cash flows • Slicing and dicing of cash flows • Examples: strips, CMOs, dual purpose funds, principal/interest splits Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc All rights reserved 10 Bodie • Kane • Marcus Essentials of Investments Fourth Edition The Future • Globalization continues and offers more opportunities • Securitization continues to develop • Continued development of derivatives and exotics • Strong fundamental foundation is critical • Integration of investments & corporate finance Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc All rights reserved  ... McGraw-Hill © 20 01 The McGraw-Hill Companies, Inc All rights reserved 6 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Investments and Innovation Technology and Delivery of Service... Risk-return trade-off Market efficiency Active vs passive management Irwin / McGraw-Hill © 20 01 The McGraw-Hill Companies, Inc All rights reserved 4 Bodie • Kane • Marcus Essentials of Investments. .. Instruments and vehicles continue to develop • Information and analysis improves Irwin / McGraw-Hill © 20 01 The McGraw-Hill Companies, Inc All rights reserved 8 Bodie • Kane • Marcus Essentials of Investments