Shared Flashcard Set

Details

FIN 3504 Chapter 1
Investments Analysis - Exam 1
34
Finance
Undergraduate 4
02/10/2010

Additional Finance Flashcards

 


 

Cards

Term
Real Assets
Definition
- Physical
- Used to produce goods and services
- generate net income to the economy
Term
Financial Assets
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
Term
Types of financial Assets
Definition
- Fixed Income
- Equity
- Derivates
- Hybrids
Term
Fixed Income Assets
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
Term
Equity Assets
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
Term
Derivative Securities
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
Term
Futures/Forwards
Definition
Obligation to buy (long) or sell (short) an asset in the future
Term
Options
Definition
Right to buy (call) or sell (put) an asset in the future
Term
Swaps
Definition
Exchange of different types of payments (e.x. fixed rate and stock index)
Term
Hybrids
Definition
- Securities that have characteristics of more than 1 type
- Very common (e.g. callable bonds)
- Harder to value
Term
Agency Problem
Definition
- Conflicts of interest between managers and stockholders
Term
Asset Allocation
Definition
allocation of an investment portfolio across broad asset classes
Term
Security Selection
Definition
Choice of specific securities within each asset class
Term
Security Analysis
Definition
Analysis of the value of securities
Term
Market Efficiency
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
Term
Arbitrage
Definition
- Riskless profit (after transactions costs)
- Carrot (arbitrage profits)
- Stick (Efficient market)
Term
Passive Investing
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
Term
Active Investing
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
Term
Macro economic analysis
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)
Term
Micro economic analysis
Definition
- Which security will outperform
- Short run or long run
- "bottom up" approach
- Security analysis (e.g. stock picker)
Term
Risk-return trade-off
Definition
Assets with higher expected returns entail greater risk
Term
Past Realizations
Definition
- Realized return (percentage change in value)
- Return volatility (risk)
- Performance evaluation
Term
Future Expectations
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)
Term
Financial intermediaries
Definition
Institutions that "connect" borrowers and lenders by accepting funds from lenders and loaning funds to borrowers
Term
Investment Companies
Definition
- Firms managing funds for investors
- An investment company may manage several mutual funds
Term
Investment bankers
Definition
Firms specializing in the sale of new securities to the public, typically by underwriting the issue
Term
Primary Market
Definition
A market in which new issues of securities are offered to the public
Term
Secondary Market
Definition
Previously issued securities are traded among investors
Term
Globalization
Definition
Tendency toward a worldwide investment environment, and the integration of international capital markets
Term
Pass-Through Securities
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
Term
Securitization
Definition
Pooling loans into standardized securities backed by those loans, which can then be traded like any other security
Term
Bundling, unbundling
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
Term
Financial Engineering
Definition
- Greater complexity
- Reduced transparency
- the process of creating and designing securities with custom-tailored characteristics
Term
Technology
Definition
- Information flow (quantity and speed)
- Electronic trading (easier, but 24/7 mode)
Supporting users have an ad free experience!