BODIE

KANE
MARCUS

8/e

Chapter 1
Investments - Background
and Issues

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
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2004 The McGraw-Hill Companies, Inc., All Rights Rese

The Investment Process

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

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2004 The McGraw-Hill Companies, Inc., All Rights Rese

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
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2004 The McGraw-Hill Companies, Inc., All Rights Rese

Financial Assets or
Securities
Debt
Money market instruments
Bonds

Common stock
Preferred stock
Derivative securities

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2004 The McGraw-Hill Companies, Inc., All Rights Rese

Investments and
Innovation
Technology and Delivery of Service
Computer advancements
More complete and timely information
Globalization
Domestic firms compete in global markets
Performance in regions depends on other
regions
Causes additional elements of risk
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2004 The McGraw-Hill Companies, Inc., All Rights Rese

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
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2004 The McGraw-Hill Companies, Inc., All Rights Rese

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
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2004 The McGraw-Hill Companies, Inc., All Rights Rese

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

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2004 The McGraw-Hill Companies, Inc., All Rights Rese

The Future

Globalization continues and offers more

opportunities
Securitization continues to develop
Continued development of derivatives and
exotics
Strong fundamental foundation is critical
Integration of investments & corporate finance
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2004 The McGraw-Hill Companies, Inc., All Rights Rese