lect.1-investments background & issues
TRANSCRIPT
-
8/3/2019 Lect.1-Investments Background & Issues
1/44
5/4/2012 Slides by Muhammad Farooq1
INVESTMENTS:BACKGROUND &
ISSUES
-
8/3/2019 Lect.1-Investments Background & Issues
2/44
5/4/2012 Slides by Muhammad Farooq2
Who is
Looking AsExecutive
-
8/3/2019 Lect.1-Investments Background & Issues
3/44
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
-
8/3/2019 Lect.1-Investments Background & Issues
4/44
5/4/2012Slides by Muhammad Farooq4
INVESTMENTS:BACKGROUND & ISSUES
20 Minutes ActivityLets prepare leadersLets prepare teamsLets unlearnLets re-learnLets remember the history
-
8/3/2019 Lect.1-Investments Background & Issues
5/44
INVESTMENTS:BACKGROUND & ISSUES
REAL ASSETSVSFINANCIAL
ASSETS TAXONOMYOFFINANCIAL
ASSETS
FINANCIALMARKETS & THE
ECONOMY
INVESTMENTPROCES
MARKETS ARECOMPETITIVE
THE PLAYERS
RECENT TRENDS
5/4/2012Slides by Muhammad Farooq5
-
8/3/2019 Lect.1-Investments Background & Issues
6/44
5/4/2012
REAL ASSETS
VSFINANCIAL ASSETS
INVESTMENTS:BACKGROUND & ISSUES
-
8/3/2019 Lect.1-Investments Background & Issues
7/445/4/2012Slides by Muhammad Farooq7
INVESTMENTS:BACKGROUND & ISSUES
What is Investment
?
-
8/3/2019 Lect.1-Investments Background & Issues
8/445/4/2012Slides by Muhammad Farooq8
INVESTMENTS:BACKGROUND & ISSUES
InvestmentInvestment is the current commitment ofmoney or other resources in the expectationof reaping future benefits.
Bottom line of Investment--------------------?
-
8/3/2019 Lect.1-Investments Background & Issues
9/445/4/2012Slides by Muhammad Farooq9
INVESTMENTS:BACKGROUND & ISSUES
1. Real Assets
Assets used to produce goods and
services
Example:
1.2.
3.
-
8/3/2019 Lect.1-Investments Background & Issues
10/445/4/2012Slides by Muhammad Farooq10
INVESTMENTS:BACKGROUND & ISSUES
Example:
1. land2. Building
3. Machine
4. Furniture5. Knowledge
6. etc.
-
8/3/2019 Lect.1-Investments Background & Issues
11/445/4/2012Slides by Muhammad Farooq11
INVESTMENTS:BACKGROUND & ISSUES
1. Financial Assets
Claim on real assets or the incomegenerated by them
Example:
1.2.
3.
-
8/3/2019 Lect.1-Investments Background & Issues
12/445/4/2012Slides by Muhammad Farooq12
INVESTMENTS:BACKGROUND & ISSUES
Example:
1. Deposits2. Life insurance reserves
3. Corporate equity
4. Personal trusts5. Debt Securities
6. etc.
-
8/3/2019 Lect.1-Investments Background & Issues
13/44
INVESTMENTS:BACKGROUND & ISSUES
5/4/2012Slides by Muhammad Farooq13
Generate
Net IncomeRealAssets
Allocate Income or wealth
among investors
Financialassets
-
8/3/2019 Lect.1-Investments Background & Issues
14/445/4/2012
TAXONOMY
OFFINANCIAL ASSETS
INVESTMENTS:
BACKGROUND & ISSUES
-
8/3/2019 Lect.1-Investments Background & Issues
15/445/4/2012Slides by Muhammad Farooq15
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
-
8/3/2019 Lect.1-Investments Background & Issues
16/445/4/2012Slides by Muhammad Farooq16
INVESTMENTS:BACKGROUND & ISSUES
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
-
8/3/2019 Lect.1-Investments Background & Issues
17/445/4/2012Slides by Muhammad Farooq17
INVESTMENTS:BACKGROUND & ISSUES
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
-
8/3/2019 Lect.1-Investments Background & Issues
18/445/4/2012Slides by Muhammad Farooq18
INVESTMENTS:BACKGROUND & ISSUES
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
-
8/3/2019 Lect.1-Investments Background & Issues
19/445/4/2012
FINANCIAL MARKETS
ANDTHE ECONOMY
INVESTMENTS:
BACKGROUND & ISSUES
-
8/3/2019 Lect.1-Investments Background & Issues
20/445/4/2012Slides by Muhammad Farooq20
INVESTMENTS:BACKGROUND & ISSUES
Financial Market---------?1. Consumption timing
2. Allocation of Risk
3. Separation of ownership andmanagement
4. Crises in Corporate governance
-
8/3/2019 Lect.1-Investments Background & Issues
21/445/4/2012Slides by Muhammad Farooq21
INVESTMENTS:BACKGROUND & ISSUES
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
-
8/3/2019 Lect.1-Investments Background & Issues
22/44
5/4/2012Slides by Muhammad Farooq22
INVESTMENTS:BACKGROUND & ISSUES
1. Allocation of Risk
Virtually all real assets involve more risk
Example;
Plant establishment may not meetexpected cash inflow
-
8/3/2019 Lect.1-Investments Background & Issues
23/44
5/4/2012Slides by Muhammad Farooq23
INVESTMENTS:BACKGROUND & ISSUES
1. Separation of ownership and
management
Separate legal entity
Entrepreneurship vs corporation
-
8/3/2019 Lect.1-Investments Background & Issues
24/44
5/4/2012Slides by Muhammad Farooq24
INVESTMENTS:BACKGROUND & ISSUES
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
-
8/3/2019 Lect.1-Investments Background & Issues
25/44
5/4/2012
THE INVESTMENT
PROCESS
INVESTMENTS:
BACKGROUND & ISSUES
-
8/3/2019 Lect.1-Investments Background & Issues
26/44
5/4/2012Slides by Muhammad Farooq26
INVESTMENTS:BACKGROUND & ISSUES
Asset
allocation
SecuritySelection
SecurityAnalysis
-
8/3/2019 Lect.1-Investments Background & Issues
27/44
5/4/2012Slides by Muhammad Farooq27
INVESTMENTS:BACKGROUND & ISSUES
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.
-
8/3/2019 Lect.1-Investments Background & Issues
28/44
5/4/2012Slides by Muhammad Farooq28
INVESTMENTS:BACKGROUND & ISSUES
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
-
8/3/2019 Lect.1-Investments Background & Issues
29/44
5/4/2012Slides by Muhammad Farooq29
INVESTMENTS:BACKGROUND & ISSUES
3. Security Analysis
Security analysis involves the valuation of
particular securities that might be included inthe portfolio.
-
8/3/2019 Lect.1-Investments Background & Issues
30/44
5/4/2012
MARKETS
ARECOMPETITIVE
INVESTMENTS:
BACKGROUND & ISSUES
-
8/3/2019 Lect.1-Investments Background & Issues
31/44
5/4/2012Slides by Muhammad Farooq31
INVESTMENTS:BACKGROUND & ISSUES
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
-
8/3/2019 Lect.1-Investments Background & Issues
32/44
5/4/2012Slides by Muhammad Farooq32
INVESTMENTS:BACKGROUND & ISSUES
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
-
8/3/2019 Lect.1-Investments Background & Issues
33/44
5/4/2012Slides by Muhammad Farooq33
INVESTMENTS:BACKGROUND & ISSUES
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.
-
8/3/2019 Lect.1-Investments Background & Issues
34/44
5/4/2012
THE
PLAYERS
INVESTMENTS:
BACKGROUND & ISSUES
-
8/3/2019 Lect.1-Investments Background & Issues
35/44
5/4/2012Slides by Muhammad Farooq35
INVESTMENTS:BACKGROUND & ISSUES
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
-
8/3/2019 Lect.1-Investments Background & Issues
36/44
5/4/2012
RECENT TRENDS
INVESTMENTS:
BACKGROUND & ISSUES
-
8/3/2019 Lect.1-Investments Background & Issues
37/44
5/4/2012Slides by Muhammad Farooq37
INVESTMENTS:BACKGROUND & ISSUES
1. Globalization
2. Securitization3. Bundling & Unbundling
4. Financial engineering
-
8/3/2019 Lect.1-Investments Background & Issues
38/44
5/4/2012Slides by Muhammad Farooq38
INVESTMENTS:BACKGROUND & ISSUES
1. Globalization
Tendency toward a worldwide investmentenvironment, and the integration ofnational capital markets.
-
8/3/2019 Lect.1-Investments Background & Issues
39/44
5/4/2012Slides by Muhammad Farooq39
INVESTMENTS:BACKGROUND & ISSUES
1. Securitization
Pooling loans into standardized securitiesbacked by those loans, which can then betraded like any other security
-
8/3/2019 Lect.1-Investments Background & Issues
40/44
5/4/2012Slides by Muhammad Farooq40
INVESTMENTS:BACKGROUND & ISSUES
1. Bundling & Unbundling
Creation of new securities either bycombining primitive and derivativesecurities into one composite
hybrid or by separating returns onan asset into classes
-
8/3/2019 Lect.1-Investments Background & Issues
41/44
5/4/2012Slides by Muhammad Farooq41
INVESTMENTS:BACKGROUND & ISSUES
1. Financial Engineering
The process of creating anddesigning securities with custom-tailored characteristics.
The process of bundling & unbundling is called
financial Engineering
-
8/3/2019 Lect.1-Investments Background & Issues
42/44
5/4/2012Slides by Muhammad Farooq42
INVESTMENTS:BACKGROUND & ISSUES
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
-
8/3/2019 Lect.1-Investments Background & Issues
43/44
5/4/2012Slides by Muhammad Farooq43
INVESTMENTS:BACKGROUND & ISSUES
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/ -
8/3/2019 Lect.1-Investments Background & Issues
44/44
HAVE A NICE WEEK AHEAD
ALLAH HAFIZ