1. The Investment Environment
Investments
Cover image
CHAPTER 1
The Investment Environment
Slides by
Richard D. Johnson
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

2. Investments & Financial Assets
Essential nature of investment
Reduced current consumption
Planned later consumption
Real Assets
Assets used to produce goods and services
Financial Assets
Claims on real assets

3. Table 1.1 Balance Sheet – U.S. Households

4. Table 1.2 Domestic Net Worth

5. Major Classes of Financial Assets
Debt
Money market instruments
Bonds
Common stock
Preferred stock
Derivative securities

6. Financial Markets and the Economy
Information Role
Consumption Timing
Allocation of Risk
Separation of Ownership and Management
Agency Issues

7. Crisis in Corporate Governance
Accounting Scandals
Examples – Enron and WorldCom
Analyst Scandals
Example – Citigroup’s Salomon Smith Barney
Initial Public Offerings
Credit Swiss First Boston

8. The Investment Process
Asset allocation
Security selection
Risk-return trade-off
Market efficiency
Active vs. passive management

9. Active vs. Passive Management
Active Management
Finding undervalued securities
Timing the market
Passive Management
No attempt to find undervalued securities
No attempt to time
Holding an efficient portfolio

10. Players in the Financial Markets
Business Firms – net borrowers
Households – net savers
Governments – can be both borrowers and savers
Investment Bankers

11. Key Trends - Globalization
International and Global Markets Continue Developing
Managing foreign exchange
Diversification to improve performance
Instruments and vehicles continue to develop (WEBs)
Information and analysis improves

12. Figure 1.1 Global Debt Issue

13. Key Trends - Securitization
Securitization & Credit Enhancement
Offers opportunities for investors and originators
Changes in financial institutions and regulation
Improvement in information capabilities
Credit enhancement and its role

14. Figure 1.2 Asset-backed Securities

15. Key Trends - Financial Engineering
Repackaging Services of Financial Intermediaries
Bundling and unbundling of cash flows
Slicing and dicing of cash flows
Examples: strips, CMOs, dual purpose funds, principal/interest splits

16. Figure 1.3 Building a Complex Security

17. Figure 1.4 Unbundling – Mortgage Security