Term
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Definition
- Physical
- Used to produce goods and services
- generate net income to the economy |
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Term
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Definition
- Claims on real assets or the income produced by real assets
- asset = contract defining those claims
- Ex: stocks and bonds
- no more than sheets of paper or, more likely, computer entries and don't contribute directly to the productive capacity of the economy
- Means by which individuals in well-developed economies hold their claims on real assets
- Claims to the income generated by real assets
- Define the allocation of income or wealth among investors |
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Term
| Types of financial Assets |
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Definition
- Fixed Income
- Equity
- Derivates
- Hybrids |
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Term
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Definition
- Bonds, loans, asset-backed securities, etc.
- Contract defines cash flows due to investor from issuer (borrower)
- Primary use: alter consumption timing
- Debt securities
- Pay a specified cash flow over a specific period |
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Term
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Definition
- Common stock
- Few promised benefits (limited voting rights, pro rata dividend rights)
- Primary use: separate ownership & control
- An ownership share in a corporation
- Not promised any particular payment
- Receive any dividends the firm may pay and have prorated ownership in the real assets of the firm
- Riskier than debt securities |
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Term
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Definition
- 3 types: futures/forwards, options, swaps
- Value is derived from the value of the underlying asset
- Primary use: reallocate risk
- Provide payoffs that depend on the values of other assets |
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Term
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Definition
| Obligation to buy (long) or sell (short) an asset in the future |
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Term
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Definition
| Right to buy (call) or sell (put) an asset in the future |
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Term
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Definition
| Exchange of different types of payments (e.x. fixed rate and stock index) |
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Term
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Definition
- Securities that have characteristics of more than 1 type
- Very common (e.g. callable bonds)
- Harder to value |
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Term
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Definition
| - Conflicts of interest between managers and stockholders |
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Term
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Definition
| allocation of an investment portfolio across broad asset classes |
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Term
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Definition
| Choice of specific securities within each asset class |
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Term
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Definition
| Analysis of the value of securities |
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Term
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Definition
- A market where securities prices properly reflect available information
- Markets cannot be truly efficient due to arbitrage
- Market prices adjust quickly but not instantaneously |
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Term
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Definition
- Riskless profit (after transactions costs)
- Carrot (arbitrage profits)
- Stick (Efficient market) |
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Term
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Definition
- Buying and holding a diversified portfolio without attempting to identify mispriced securities
- Investor sees no market inefficiency that s/he can exploit
- Choose fixed asset allocation
- Use index funds, ETFs, etc. to duplicate the returns of each asset class
- Focus on minimizing costs |
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Term
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Definition
- Investor sees one or more inefficiencies that s/he can exploit (price adjustment is slow or incomplete)
- Market timing - asset allocation
- Analysis - security selection
- Attempting to identify mispriced securities or to forecast broad market trends |
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Term
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Definition
- Which asset class will outperform others over the short run
- "top down" approach
- Tactical asset allocation decisions - temporarily move away from long-term (strategic) allocation (e.g. stocks vs. bonds vs. cash) |
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Term
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Definition
- Which security will outperform
- Short run or long run
- "bottom up" approach
- Security analysis (e.g. stock picker) |
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Term
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Definition
| Assets with higher expected returns entail greater risk |
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Term
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Definition
- Realized return (percentage change in value)
- Return volatility (risk)
- Performance evaluation |
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Term
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Definition
- Expected return
- Multiple measures of risk:
- Volatility (standard deviation of expectations)
- Focus on losses only (semi-deviation)
- Skewness (are large negative outcomes more likely than large positive outcomes?)
- Tail risk (likelihood of infrequent, bad outcomes) |
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Term
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Definition
| Institutions that "connect" borrowers and lenders by accepting funds from lenders and loaning funds to borrowers |
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Term
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Definition
- Firms managing funds for investors
- An investment company may manage several mutual funds |
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Term
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Definition
| Firms specializing in the sale of new securities to the public, typically by underwriting the issue |
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Term
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Definition
| A market in which new issues of securities are offered to the public |
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Term
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Definition
| Previously issued securities are traded among investors |
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Term
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Definition
| Tendency toward a worldwide investment environment, and the integration of international capital markets |
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Term
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Definition
- Pools of loans (such as home mortgage loans) sold in one package
- Owners receive all of the principal and interest payments made by the borrowers |
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Term
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Definition
| Pooling loans into standardized securities backed by those loans, which can then be traded like any other security |
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Term
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Definition
| creation of new securities either by combining primitive and derivative securities into one composite hybrid or by separating returns on an asset into classes |
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Term
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Definition
- Greater complexity
- Reduced transparency
- the process of creating and designing securities with custom-tailored characteristics |
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Term
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Definition
- Information flow (quantity and speed)
- Electronic trading (easier, but 24/7 mode) |
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