lect.1-investments background & issues

8/3/2019 Lect.1-Investments Background & Issues

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5/4/2012 Slides by Muhammad Farooq1

INVESTMENTS:BACKGROUND &

ISSUES


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5/4/2012 Slides by Muhammad Farooq2

Who is

Looking AsExecutive


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5/4/2012Slides by Muhammad Farooq3

INVESTMENTS:BACKGROUND & ISSUES

LEARNING GOALS To Define an investment To Distinguish between real assets and financial

assets

To Describe the major steps in the construction

of an investment portfolio

To Identify major participants in financial market

To Identify types of financial markets and recenttrends in those markets


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20 Minutes ActivityLets prepare leadersLets prepare teamsLets unlearnLets re-learnLets remember the history


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REAL ASSETSVSFINANCIAL

ASSETS TAXONOMYOFFINANCIAL

ASSETS

FINANCIALMARKETS & THE

ECONOMY

INVESTMENTPROCES

MARKETS ARECOMPETITIVE

THE PLAYERS

RECENT TRENDS



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5/4/2012

REAL ASSETS

VSFINANCIAL ASSETS



7/445/4/2012Slides by Muhammad Farooq7


What is Investment

?




InvestmentInvestment is the current commitment ofmoney or other resources in the expectationof reaping future benefits.

Bottom line of Investment--------------------?




1. Real Assets

Assets used to produce goods and

services

Example:

1.2.

3.




Example:

1. land2. Building

3. Machine

4. Furniture5. Knowledge

6. etc.




1. Financial Assets

Claim on real assets or the incomegenerated by them

Example:

1.2.

3.




Example:

1. Deposits2. Life insurance reserves

3. Corporate equity

4. Personal trusts5. Debt Securities

6. etc.


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Generate

Net IncomeRealAssets

Allocate Income or wealth

among investors

Financialassets


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TAXONOMY

OFFINANCIAL ASSETS

INVESTMENTS:

BACKGROUND & ISSUES




It is common to distinguish among three broad types of

financial assets:

1. Fixed Income Securities

2. Equity Securities

3. Derivative Securities




1. Fixed Income Securities

Fixed income securities promise either a

fixed stream of income or a stream ofincome that is determined according to a

specified formulaExample:

Corporate Bonds Fixed Interest Income




1. Equity Securities

An ownership share in a corporation

Equity Securities tend to be Riskier than investmentsin Fixed Income Securities

Example:

Shares or Stocks Dividend Income




1. Derivative SecuritiesOptions and futures contracts provide payoffsthat are determined by the prices of other assetssuch as bond or stock prices.

Example:

Price of stock if below or rises will give chanceto call option


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FINANCIAL MARKETS

ANDTHE ECONOMY

INVESTMENTS:

BACKGROUND & ISSUES




Financial Market---------?1. Consumption timing

2. Allocation of Risk

3. Separation of ownership andmanagement

4. Crises in Corporate governance




1. Consumption timing

Some individuals in economy are earning morethan they currently wish to spend.

others

like retirees spend more than theycurrently earn.

When highly earning, invest in financial assets and

spend when low earnings


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1. Allocation of Risk

Virtually all real assets involve more risk

Example;

Plant establishment may not meetexpected cash inflow


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1. Separation of ownership and

management

Separate legal entity

Entrepreneurship vs corporation


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1. Crises in Corporate governance

a) Accounting Scandalsb) Analyst scandals

CSFB (Credit Suisse First Bosten: Investment Banking)

IPO to officers of firm in exchange for investment banking

HealthSouth (Health care) 4 Billion profits


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5/4/2012

THE INVESTMENT

PROCESS

INVESTMENTS:

BACKGROUND & ISSUES


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Asset

allocation

SecuritySelection

SecurityAnalysis


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1. Asset allocation

Asset allocation decision is the choice among

these broad asset classes

Investment assets can be categorized into broadasset classes, such as stocks, bonds, real estate,commodities.


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2. Security Selection

Security selection decision is the choice of

which particular securities to hold within eachasset class.

Security selection may be on return basis


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3. Security Analysis

Security analysis involves the valuation of

particular securities that might be included inthe portfolio.


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5/4/2012

MARKETS

ARECOMPETITIVE

INVESTMENTS:

BACKGROUND & ISSUES


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1. Risk Return Trade-Off

There should be a risk return trade off in the

security markets, with higher-risk assets pricedto offer higher expected returns than lower-riskassets

Assets with higher expected returns entail greater risk


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2. EFFICIENT MARKETS

A market that allocates funds to their most

productive uses as a result of competitionamong wealth-maximizing investors thatdetermines and publicizes prices that are

believed to be close to their true value


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Passive management

Buying and holding a diversified portfoliowithout attempting to identify mispricedsecurities.

Active management

Attempting to identify mispriced securities or to

forecast broad market trends.


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5/4/2012

THE

PLAYERS

INVESTMENTS:

BACKGROUND & ISSUES


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1. Firms are net borrowers

2. Households typically are net savers3. Govt. can be borrowers or lenders

Financial intermediaries

Institutions that connect borrowers and

lenders by accepting funds from lendersand loaning funds to borrowers


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5/4/2012

RECENT TRENDS

INVESTMENTS:

BACKGROUND & ISSUES


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1. Globalization

2. Securitization3. Bundling & Unbundling

4. Financial engineering


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1. Globalization

Tendency toward a worldwide investmentenvironment, and the integration ofnational capital markets.


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1. Securitization

Pooling loans into standardized securitiesbacked by those loans, which can then betraded like any other security


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1. Bundling & Unbundling

Creation of new securities either bycombining primitive and derivativesecurities into one composite

hybrid or by separating returns onan asset into classes


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1. Financial Engineering

The process of creating anddesigning securities with custom-tailored characteristics.

The process of bundling & unbundling is called

financial Engineering


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GLOSSERY:Investment Alternative Investment

Residential Real-estate Commercial Real Estate

Capital Strike Foreign Direct Investment

Active Management Financial Intermediaries

Passive Management Risk-Return Trade-Off

Agency Problem Fixed Income Securities

Bundling Primary Market

Unbundling Investment Bankers

Derivative Securities Secondary Market


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1. Helping Websites

2. www.finance.yahoo.com3. www.ceoexpress.com

4. www.thecorporatelibrary.com

5. www.corpgov.net

6. www.finpipe.com7. www.financewise.com

8. www.moneycentral.msn.com
http://www.ceoexpress.com/http://www.ceoexpress.com/http://www.thecorporatelibrary.com/http://www.corpgov.net/http://www.finpipe.com/http://www.financewise.com/http://www.moneycentral.msn.com/http://www.moneycentral.msn.com/http://www.financewise.com/http://www.finpipe.com/http://www.corpgov.net/http://www.thecorporatelibrary.com/http://www.ceoexpress.com/http://www.ceoexpress.com/http://www.ceoexpress.com/


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HAVE A NICE WEEK AHEAD

ALLAH HAFIZ

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