Essentials of Investments: Chapter 1 - Investments - Background and Issues

1

Bodie • Kane • Marcus

Essentials of Investments

Fourth
Edition

Chapter 1
Investments - Background and
Issues

Irwin / McGraw-Hill

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.


2

Bodie • Kane • Marcus

Essentials of Investments

Fourth
Edition

Investments & 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 assets

Irwin / McGraw-Hill

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.


3

Bodie • Kane • Marcus

Essentials of Investments

Fourth
Edition

The Investment Process
•
•
•
•
•

Asset allocation

Security selection
Risk-return trade-off
Market efficiency
Active vs. passive management

Irwin / McGraw-Hill

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.


4

Bodie • Kane • Marcus

Essentials of Investments

Fourth
Edition

Active vs. Passive Management
Active Management
• Finding undervalued securities
• Timing the market
Passive Management
• No attempt to find undervalued
securities
• No attempt to time
• Holding an efficient portfolio
Irwin / McGraw-Hill

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.


5

Bodie • Kane • Marcus

Essentials of Investments

Fourth
Edition

Major Classes of Financial Assets or
Securities
• Debt
– Money market instruments
– Bonds

• Common stock
• Preferred stock
• Derivative securities

Irwin / McGraw-Hill

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.


6

Bodie • Kane • Marcus

Essentials of Investments

Fourth
Edition

Investments and Innovation
Technology and Delivery of Service
• Computer advancements
• More complete and timely information
Globalization
• Domestic firms compete in global
markets
• Performance in regions depends on
other regions
• Causes additional elements of risk
Irwin / McGraw-Hill

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.


7

Bodie • Kane • Marcus

Essentials of Investments

Fourth
Edition

Key Trends - Globalization
International and Global Markets
Continue Developing
• Managing foreign exchange
• Diversification to improve
performance
• Instruments and vehicles continue
to develop
• Information and analysis improves
Irwin / McGraw-Hill

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.


8

Bodie • Kane • Marcus

Essentials of Investments

Fourth
Edition

Key Trends - Securitization
Securitization & Credit Enhancement
• Offers opportunities for investors and
originators
• Changes in financial institutions and
regulation
• Improvement in information

capabilities
• Credit enhancement and its role
Irwin / McGraw-Hill

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.


9

Bodie • Kane • Marcus

Essentials of Investments

Fourth
Edition

Key Trends Financial Engineering
Repackaging Services of Financial
Intermediaries
• Bundling and unbundling of cash flows
• Slicing and dicing of cash flows
• Examples: strips, CMOs, dual
purpose funds, principal/interest
splits

Irwin / McGraw-Hill

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.

10

Bodie • Kane • Marcus

Essentials of Investments

Fourth
Edition

The Future
• Globalization continues and offers more
opportunities
• Securitization continues to develop
• Continued development of derivatives
and exotics
• Strong fundamental foundation is critical
• Integration of investments & corporate
finance

Irwin / McGraw-Hill

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.