FM

• Financial investment


  The allocation of money or assets that are expected to yield some gain over a period of time
• Financial claims

  Stocks and bonds
• Characteristics of investment

  • Risk
  • Safety
  • Liquidity
• Risk


  The possibility of incurring a loss in a financial transaction, arising from the possibility of variation in returns from an investment
• Risk and return


  Higher return is associated with higher risk
• Capital gains


  Profits through price changes, rather than income from the investment
• Types of investors


  • Risk-averse investors (bulls and chicken)
  • Risk-taker investors (bears and pigs)
  • Risk-neutral investors
• Financial markets


  Structures through which funds flow, institutions and systems that facilitate transactions in financial assets
• Financial markets


  • Primary market
  • Secondary market
• Money market


  Markets for short-term debt instruments, usually issued by companies with high credit standing
• Major participants in money market

  • Treasury Department
  • Federal Reserve
  • Commercial Banks
  • Businesses
  • Investment and Securities Firms
  • Individuals
• Repurchase agreement


  The rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds
• Government securities


  • Treasury Bills (mature in less than a year)
  • Treasury Bonds (mature beyond 1 year)
• Eurodollar certificates


  A certificate of deposit paying interest and principal in dollars, but issued by a bank outside the United States, usually in Europe
• Capital markets

  Markets for long term securities, including debt securities (notes, bonds, mortgages, leases) and equity securities (stocks)
• Components of capital markets

  • Securities market
  • Negotiated market
• Securities markets

  • Stock market for equity securities
  • Bond market
  • Derivative securities market
• Negotiated markets

  • Loan market
  • Mortgage market
  • Lease market
• Asset allocation


  The process of deciding how to distribute an investor's wealth among different countries and asset classes for investment purposes
• Individual investor life cycle

  • The preliminaries
  • Insurance
  • Cash reserve
• Life cycle net worth and investment strategies

  • Accumulation phase
  • Consolidation phase
  • Spending phase
  • Gifting phase
• Life cycle investment goals

  • Near-term, high-priority goals
  • Long-term, high-priority goals
  • Lower-priority goals
• Portfolio management process


  The systematic approach used by investors or fund managers to construct, maintain, and adjust investment portfolios to achieve specific financial goals and objectives
• Portfolio management process

  • Process statement focus
  • Examine current and projected conditions
  • Implement the plan by constructing the portfolio
  • Feedback loop
• Need for a policy statement


  Provides discipline for the investment process and reduces the possibility of making hasty, inappropriate decisions
• Standards for evaluating portfolio performance


  The portfolio's performance should be compared to guidelines specified in the policy statement, not on the portfolio's overall return
• Investment objectives


  An investor's investment goals expressed in terms of both risk and returns
• Risk tolerance


  An individual's willingness and capacity to accept financial risk in their investing plan
• Capital preservation


  Investors want to minimize their risk of loss, usually in real terms: They seek to maintain the purchasing power of their investment
• Capital appreciation


  An appropriate objective when the investors want to grow their wealth over the long-term
• Affected by other factors

  Including a person's current insurance coverage and cash reserves
• Also affected by an individual's family situation

  For example, marital status and the number and ages of children
• Capital Preservation


  Investors want to minimize their risk of loss, usually in real terms: They seek to maintain the purchasing power of their investment. The return needs to be no less than the rate of inflation.
• Risk Tolerance Quiz


  A tool used by financial experts and investors to determine an individual's willingness and capacity to accept financial risk in their investing plan. The quiz's objective is to assist investors in understanding how comfortable they are with certain degrees of risk and to help them make investing decisions that are consistent with their tastes and financial goals.
• Capital Appreciation


  An appropriate objective when the investors want the portfolio to grow in real terms over time to meet some future need. Under this strategy, growth mainly occurs through capital gains.
• Current Income


  The return objective, the investors want the portfolio to concentrate on generating income rather than capital gains.
• Total Return


  The objective for the total return strategy is similar to that of capital appreciation; namely, the investors want the portfolio to grow over time to meet a future need.
• Investment Constraints


  • Liquidity Needs
  • Time Horizon
  • Tax Factors
  • Legal and Regulatory Constraints
  • Unique Needs and Preferences
• Liquidity Needs


  An asset is liquid if it can be quickly converted to cash at a price close to fair market value. Generally, assets are more liquid if many traders are interested in a fairly standardized product.
• Time Horizon


  Investors with long investment horizons generally require less liquidity and can tolerate greater portfolio risk. Investors with shorter time horizons generally favor more liquid and less risky investments because losses are harder to overcome during a short time frame.