Professional Documents
Culture Documents
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What is Investment?
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Real vs Financial Assets
Real Assets
– Assets used to produce goods and services
– ex: property, land, building, machines, human
capital, knowledge, etc
Financial Assets
– Claims on returns by real assets
– No direct contribution to productive capacity
– ex: stocks, bonds, derivative securities, etc
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Real versus Financial Assets
Financial Assets:
Claims on Real Assets or
Real Asset Income
Productive
Capacity
Property,
plants and
equipment,
human
capital, etc.
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Role of Financial Assets
Efficient separation of ownership and
management
Efficient risk sharing
Efficient allocation of fund and timing
When basic needs are met, shift
consumption by investing surplus
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Balance Sheet, U.S. Households, 2017
Assets $ Billion % Total Liabilities and Net Worth $ Billion % Total
Real assets
Real estate $26,528 24.6% Mortgages $9,994 9.3%
Consumer durables 5,418 5.0% Consumer credit 3,765 3.5%
Other 485 0.4% Bank and other loans 998 0.9%
Total real assets $28,330 29.6% Other 348 0.3%
Note: Column sums may differ from total because of rounding error.
SOURCE: Flow of Funds Accounts of the United States, Board of Governors of the Federal Reserve System, March 2017.
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Financial Assets vs Liabilities
• Financial Assets and Liabilities must balance.
Financial Assets
(Owner of the claim)
Financial Liability
(Issues of the Claim)
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Domestic Net Worth, 2017
Assets $ Billion
Commercial real estate $18,335
Residential real estate 33,061
Equipment and IP 8,449
Inventories 2,523
Consumer durables 5,418
TOTAL $67,786
Note: Column sums may differ from total because of rounding error.
SOURCE: Flow of Funds Accounts of the United States, Board of Governors of the
Federal Reserve System, March 2017.
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Financial Assets
Common Stock
Ownership stake in entity,
residual cash flow
Asset
Classes
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The Investment Process
Asset allocation
- Percentage of fund in asset classes
Security selection
Choosing specific securities within a class
Top-down vs Bottom-up approaches
Risk-return trade-off
Market efficiency (market is fair!)
Active vs. passive management
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Active vs. Passive Management
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Players in Financial Markets
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Players in Financial Markets
Investment Bankers - firms that specialize
in primary market transactions
In primary markets, newly issued
securities offered to public
– Investment banker typically “underwrites”
issue
In secondary markets, preexisting
securities traded among investors
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Functions of Financial System
Transfer resources across time and region
Manage uncertainty and control risk
Provide ways of settling payments for
goods and services
Provide information on macroeconomic
variables and market expectations
Agency problem
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Corporate Governance
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Key Trends - Globalization
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Key Trends - Securitization
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Conclusion
Always think the financial system in terms
of financial function not the institution
Make sure to understand functions and
regulations when making investment
decisions
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