PV Viswanath For a First Course in INvestments Learning Goals 2 Distinguish between the real economy and the financial economy The Financial System What is the Role of the financial markets ID: 782200
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Slide1
The Investment Environment
P.V.
Viswanath
For a First Course in
INvestments
Slide2Learning Goals
2
Distinguish between the real economy and the financial economy
The Financial System
What is the Role of the financial markets?
Slide3Real Assets vs Financial Assets
3
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
The two systems are parallel, but not
entirely
You can have trading in financial assets, with no change in the amount of real assets, or you can have creation of new financial assets which then also causes a change in real assets.
Sometimes financial assets that have not been traded up to that point then become
tradeable
– i.e. securitization, but this does not increase the amount
of real assets.
Slide4P.V. Viswanath
4
Financial System: Flow of Funds
Slide5Role of Financial Markets
5
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: This allows the firm to operate on a day-to-day basis even as shareholders acquire increased liquidity and change possibly from minute-to-minute. However, with stability comes agency problems. Are managers interested in maximizing shareholder wealth?
Slide6Players in Financial Markets
6
Households
Firms
Government
Financial Intermediaries/Financial Service Companies
Slide7P.V. Viswanath
7
Examples of Financial Intermediaries
Commercial Banks
Insurance Companies
Pension and Retirement Funds
Mutual Funds
Investment Banks
Venture Capital Firms
Asset Management Firms
Information Service Providers
Slide8The Investment Process
8
Top down
Asset Allocation – how much to invest in broad security classes
Security
Selection – what securities to hold within a security class
Bottom up
Security Analysis
Start with bottom up and pay attention to portfolio characteristics