《《Topic1_Investment Environment》.pdf

BUFN 740: Capital Markets Topic 1 The Investment Environment and Historical Record BKM 1-5 Real Assets Versus Financial Assets   Real Assets –  Determine the productive capacity and net income of the economy –  Examples: Land, buildings, machines, knowledge used to produce goods and services   Financial Assets –  Claims on real assets –  Three types: Fixed income or debt, Common stock or equity, Derivative securities 2011 Fall BUFN 740 Capital Markets Topic 1 2 Fixed Income   Payments fixed or determined by a formula   Money market debt: short term, highly marketable, usually low credit risk   Capital market debt: long term bonds, can be safe or risky 2011 Fall BUFN 740 Capital Markets Topic 1 3 Common Stock and Derivatives   Common Stock is equity or ownership in a corporation. –  Payments to stockholders are not fixed, but depend on the success of the firm   Derivatives –  Value derives from prices of other securities, such as stocks and bonds –  Used to transfer risk 2011 Fall BUFN 740 Capital Markets Topic 1 4 Financial Markets and the Economy   Information Role: Capital flows to companies with best prospects   Consumption Timing: Use securities to store wealth and transfer consumption to the future   Allocation of Risk: Investors can select securities consistent with their tastes for risk   Separation of Ownership and Management: With stability comes agency problems 2011 Fall BUFN 740 Capital Markets Topic 1 5 The Investment Process   Asset allocation –  Choice among broad asset classes –  Should you inves