im-01-4e - CHAPTER ONE INVESTMENTS: BACKGROUND AND ISSUES...

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CHAPTER ONE INVESTMENTS: BACKGROUND AND ISSUES CHAPTER OVERVIEW In this chapter the student is introduced to the general concept of investing, i. e., foregoing spending cash today in the hopes of increasing wealth in the future. Real assets are differentiated from financial assets, and the major categories of financial assets are defined. The risk/return tradeoff and the reality that most assets are efficiently (fairly) priced most of the time are introduced. The role of financial intermediaries is discussed as is the increased globalization of the financial markets. LEARNING OBJECTIVES After studying this chapter students should have an understanding of the overall investment process and understand some key elements involved in the investment process. Students should understand differences in financial and real assets and be able to identify the major components of the investment process. Students should be able to describe a derivative security and understand how they are used in our markets after studying this chapter. PRESENTATION OF MATERIAL 1. Investment Process The key elements of the chapter are presented in T 1-1. The concept of giving up current consumption to invest funds in assets that allow greater consumption in the future is the key notion to start discussion of the chapter material. The discussion of real and financial assets can be used to discuss key differences in the assets and their appropriateness as investment vehicles. Major components of the investment process are described in T 1-3. Two of the major elements in the investment process, asset allocation and security selection can be used to discuss the content and coverage in the course. Previewing the concept of risk-return trade-off is important for the development of portfolio theory and many other concepts developed in the course. The discussion of active and
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im-01-4e - CHAPTER ONE INVESTMENTS: BACKGROUND AND ISSUES...

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