FINANCE 7320 ADVANCED INVESTMENT ANALYSIS

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FINANCE 7320ADVANCED INVESTMENT ANALYSIS
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OUTLINE

• Main Themes
• Real V. Financial Assets
• Clients of Financial System
• Financial Institutions Innovation
• Markets and Market Structure
• Trends

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Main Themes

• Risk - Return Tradeoff
• Active v. Passive Portfolio Management
• Timing
• Selection
• Equilibrium pricing relationships
• Derivative other securities
• Sophistication of practitioners

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Real Assets

• Assets which generate actual cash flows
• Land, buildings, machines, knowledge, etc.
• Add to productive capacity
• Appear on left-hand side of balance sheet
• Destroyed by physical damage or wear

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Financial Assets

• Claims on cash flows from real assets
• Appear on both sides of balance sheet
• In the aggregate,net to 0!
• Aid productive capacity by allowing
• Consumption timing
• Allocation of risk
• Separation of Ownership Control

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Clients of Financial System

• Household Sector
• Typically demand financial assets
• Demand depends on
• Risk preferences
• Tax situation
• Supply Home mortgages install. Loans

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Clients of Financial System

• Business sector
• Typically supply financial assets
• Borrows by issuing
• Bonds
• Stocks
• Typically use investment bankers
• Costly
• Immense effort

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Clients of Financial System

• Government sector
• Typically supply financial assets
• Borrows by issuing bonds bills
• Repays through taxing authority
• Regulates financial sector

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Financial Institutions Innovations

• Financial intermediaries
• Banks
• Sls
• Insurance companies
• Investment companies
• Balance sheet primarily financial securities
• Provide efficiency to financial system

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Financial Intermediaries

• Eliminates matching borrowers lenders
• HH invests in bank
• Business borrows from bank
• Solves SIZE problem
• Businesses borrow LARGE amounts
• HH typically invest SMALL
• Economies of scale in
• Processing
• Credit risk analysis monitoring
• Diversification

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Investment Banks

• Specialize in raising capital for bus/govt
• Constantly in market
• Too costly for individual businesses to do
• Reputation important
• Certification role
• Involved with security pricing design

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Mutual Funds

• Help solve SMALLNESS problem of HH
• Investors pool money to invest
• Economies of scale
• Diversification
• Trading costs
• Information gathering analysis

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Financial Innovation Trends

• Securitization
• Pools of mortgages, car loans, etc.
• Pass-through securities
• Derivative securities
• Hedging risk
• Speculation
• Globalization
• Financial Engineering

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Market Types

• Direct Market
• Borrowers / lenders seek each other out
• Search costs
• Size problem
• Credit monitoring
• Accounting / administrative costs
• Little volume heterogenous assets

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Market Types

• Brokered Market
• Broker brings together buyers sellers
• Maintains customer list
• May help value assets
• Does not hold inventory / take a position
• Ex Real estate
• More volume

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Market Types

• Dealer Market
• Holds position in assets (inventory)
• Quotes Bid (buy) Ask (sell) prices
• Requires a lot of market activity
• Auction Market (NYSE)
• Buyers sellers meet at one place
• Almost a continuous market