1 23 active vs passive management active management

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Unformatted text preview: efficient affects our choice of appropriate investment management style. 1-23 Active vs. Passive Management Active Management (inefficient markets) Active Finding undervalued securities Timing the market Passive Management (efficient markets) Passive No attempt to find undervalued securities • Indexing No attempt to time • Constructing an Holding an efficient portfolio “efficient” portfolio 1-24 Players in the Financial Markets Business Firms – net borrowers Business Households – net savers Governments – can be both borrowers Governments and savers and Financial Intermediaries – Commercial Banks : Traditional line of business: Make Commercial loans funded by deposits loans – Investment companies – Insurance companies – Pension Funds – Hedge Funds 1-25 The Players Cont. Investment Bankers o Firms that specialize in primary market Firms transactions transactions o Primary market: A market where newly issued securities are offered to market the public. The investment banker typically ‘underwrites’ the issue. The o Secondary market A market where pre-existing securities are traded among market investors. investors. 1-26 Investment Bankers Investment Bankers o Commercial and investment banks’ functions and Commercial organizations were separated by law from 1933 to 1999. o Post 1999 large investment banks, collectively Post known as “Wall Street,” operated independently from commercial banks, although many of the large commercial banks increased their investment banking activities, pressuring profit margins of investment banks. investment o In September 2008 major investment banks either In went bankrupt, reorganized as commercial banks or were purchased by commercial banks as a result of the collapse of the mortgage markets. the 1-27 Table 1.3 Balance Sheet of Table Commercial Banks, 2011 Commercial Assets Real assets Equipment and premises Other real estate Total real assets Financial assets Cash Investment securities Loans and leases Other financial assets Total financial assets Other assets Intangible assets Other Total other assets TOTAL $ Billion 110.4 46.6 157.0 % Total 0.9% 0.4% 1.3% Liabilities...
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