Spring 2020 F303: Intermediate Investments Susan Monaco Email: [email protected] Office: Hodge Hall 6142 Office Hours: By appointment
What is this Course About? Valuation of financial assets: Fixed income Equity Derivative securities Emphasis on the risk-return trade-of How to combine assets in order to decrease risk, i.e. diversification How to create efficient portfolios
Theory versus Practice Financial Markets are continuously evolving New securities New trading strategies New computing technologies New regulations Financial Theory is continuously improving as well. For this reason, it is important to understand: The basic principles of investing How the financial models have evolved Develop a critical view of these theories (ex. CAPM)
Combining theory with practice 1. Use applied spreadsheets for financial modeling (basic instrument in the financial world) 2. Real time investment by using a simulation broker (Stock Trak) 3. Discuss financial news
What is an Investment? An investment is the current commitment of money (or other resources) for some future expected value. It is the sacrifice of current consumption for some future (often uncertain) value. The focus of this class is on investments in financial assets : stocks, bonds, derivative securities. Investments allow for economic development. Households are typically net purchasers of investments, businesses and governments are typically net suppliers of investments .
Consumption Timing • Consumption smoothes over time - when current basic needs are met, shift consumption through time by investing surplus Investment Allows for Consumption Smoothing Consumption Income Savings Dissavings Dissavings Age Dollars
Nature of Investment: Reduce current consumption for greater future consumption Real versus Financial Assets Financial Assets : Claims on Real Assets or Real Asset Income Real Assets : Land, buildings, equipment, human capital Goods and Services Invest now Produ ces Pays holders of financial assets later
Basic Questions Investors Ask 1. What is the investment environment? Are investors protected by law ? What financial assets are available? how liquid these markets are? Are these markets efficient? What is the expected return and risk of each asset? How do we quantify risk and return? How can they decrease risk? 2. What is the investment process? What is the risk profile of the investor? Will the investor be active or passive after the investment is made? What would be the appropriate asset allocation among classes of securities? What would be selection of securities within each class?
The Investment Process: Asset Allocation Asset Allocation •
- Spring '14