CHAPTER 1

The Investment Environment

Investments, 8th editionBodie, Kane and MarcusSlides by Susan HineMcGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Real Assets Versus Financial Assets Essential nature of investment – Reduced current consumption – Planned later consumption Real Assets – Assets used to produce goods and services Financial Assets – Claims on real assets1-2

Table 1.1 Balance Sheet of U.S. Households, 2007

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Table 1.2 Domestic Net Worth

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A Taxonomy of Financial Assets Fixed income or debt – Money market instruments Bank certificates of deposit – Capital market instruments Bonds Common stock or equity Derivative securities

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Financial Markets and the Economy Information Role – The Google effect Consumption Timing Allocation of Risk Separation of Ownership and Management – Agency Issues

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Financial Markets and the Economy Continued Corporate Governance and Corporate Ethics – Accounting Scandals Examples – Enron, Rite Aid, HealthSouth – Auditors—watchdogs of the firms – Analyst Scandals Arthur Andersen – Sarbanes-Oxley Act Tighten the rules of corporate governance1-7

The Investment Process Asset allocation – Choice among broad asset classes Security selection – Choice of which securities to hold within asset class Security analysis

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Markets are Competitive Risk-Return Trade-Off Efficient Markets – Active Management Finding mispriced securities Timing the market – Passive Management No attempt to find undervalued securities No attempt to time the market Holding a highly diversified portfolio1-9

The Players Business Firms– net borrowers Households – net savers Governments – can be both borrowers and savers Financial Intermediaries – Investment Companies – Banks – Insurance companies – Credit unions1-10

The Players Continued Investment Bankers – Perform specialized services for businesses – Markets in the primary market

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Table 1.3 Balance Sheet of Commercial Banks, 2007

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Table 1.4 Balance Sheet of Nonfinancial U.S. Business, 2007

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Recent Trends—Globalization American Depository Receipts (ADRs) Foreign securities offered in dollars Mutual funds that invest internationally Instruments and vehicles continue to develop (WEBs) Exchange Traded Funds (ETFs)

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Figure 1.1 Globalization: A Debt Issue Denominated in Euros

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Recent Trends—Securitization Mortgage pass-through securities Other pass-through arrangements – Car, student, home equity, credit card loans Offers opportunities for investors and originators

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