2 33 05 04 08 193 58058 71932 807 1000 networth 1 16

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Unformatted text preview: otal 10,215 2,404 384 316 556 13,875 14.2% 3.3% 0.5% 0.4% 0.8% 19.3% 58,058 71,932 80.7% 100.0% Net worth 1-16 Domestic Net Worth, 2011 Assets $ Billion Commercial real estate 14,248 Residential real estate 18,117 Equipment and software 4,413 Inventories 1,974 Consumer durables 4,665 TOTAL 43,417 Note: Column sums may differ from total because of rounding error. SOURCE: Flow of Funds Accounts of the United States, Board of Governors of the Federal Reserve System, June 2011. 1-17 Major Classes of Financial Assets or Securities Debt – Money market instruments Money Bank certificates of deposit (US Treas.bill,CD) – Capital market instruments Capital Bonds (Treasury bonds, Bonds “junk” bonds) “junk” Common stock (equity) (equity) Common Preferred stock (equity) (equity) Preferred Derivative securities (OPTIONS and FUT.) to Derivative hedge risks or transfer them to other parties. hedge 1-18 Financial Markets and the Economy Informational Role of Financials Markets – The Google effect Consumption Timing Allocation of Risk Separation of Ownership and Separation Management Management – Agency Issues (conflict of interest between Agency managemers and shareholders) solution: stock-options stock-options 1-19 The Investment Process Asset allocation Security selection Risk-return trade-off Market efficiency Active vs. passive management TOP-DOWN or BOTTOM-UP, macro-level, industry-level, TOP-DOWN company-level. (CFA). company-level. 1-20 The Investor’s Portfolio Asset allocation: is the primary determinant of a portfolio’s return (explains 90% of the variability in returns in explains a fund over time.) fund – Choice among broad asset classes: stocks, bonds, Choice altenative assets, money markets securities altenative - Common rule is 110- age = % in equities. - Brokerage house typically put out recommended blends (currently about 65% stocks, 25% bonds) Security selection Security – Choice of which securities to hold within asset class Choice 1-21 Risk-Return Trade-Off How should one measure risk Assets with higher expected returns have Assets greater risk greater What role does diversification play 1-22 Efficient Markets Theory Should be neither underpriced nor Should overpriced securities overpriced Security price should reflect all information Security available to investors available – Whether we believe markets are...
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