CHAPTER 1 Investments Background and Issues Mc GrawHillIrwin

1. 1 REAL ASSETS VERSUS FINANCIAL ASSETS 1 -2

Financial Versus Real 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 1 -3

Table 1. 1. Balance Sheet – U. S. Households, 2006 1 -4

Table 1. 2 Domestic Net Worth, 2006 1 -5

1. 2 A TAXONOMY OF FINANCIAL ASSETS 1 -6

Major Classes of Financial Assets or Securities Debt – Money market instruments (貨幣市場) Bank certificates of deposit (CD) – Capital market instruments Bonds (公司債) Common stock (普通股股票) Preferred stock (特別股股票) Derivative securities (衍生性金融商品) 1 -7

1. 3 FINANCIAL MARKETS AND THE ECONOMY 1 -8

Financial Markets Informational Role of Financials Markets – The Google effect Consumption Timing (時機) Allocation of Risk (風險分攤) Separation of Ownership and Management (所有權與經營權分開) – Agency Issues (代理問題) 1 -9

Corporate Governance and Ethics Accounting Scandals (醜聞: 會計舞弊案) – Examples – Enron and World. Com Misleading research reports (錯誤引導的研究報告) Auditors watchdogs or consultants (查帳員的看管與顧問行為) – Example – Arthur Andersen and Enron Sarbanes-Oxley Act (美國沙士法案) – Tighten the rules of corporate governance (公司治理問題) 1 -10

1. 4 THE INVESTMENT PROCESS 1 -11

The Investor’s Portfolio Asset allocation (資產配置) – Choice among broad asset classes Security selection (有價證券的選擇) – Choice of which securities to hold within asset class 1 -12

1. 5 MARKETS ARE COMPETITIVE 1 -13

Risk-Return Trade-Off How should one measure risk (如何衡量風險) Assets with higher expected returns have greater risk (高風險高報酬) What role does diversification play (多角化的角色) 1 -14

Efficient Markets Theory(效率市場理論) Should be neither underpriced (低估) nor overpriced (高估) securities Security price should reflect all information available to investors (價格應該反映所有資訊) 1 -15

Active Versus Passive Management (主動與被動管理) Active Management Finding undervalued securities Timing the market (找到有利的時機) Passive Management No attempt to find undervalued securities No attempt to time (不會利用時機) Holding an efficient portfolio 1 -16

1. 6 THE PLAYERS (市場參與者) 1 -17

The Players Business Firms – net borrowers (借款人) Households – net savers (存款戶) Governments – can be both borrowers and savers (政府) Financial Intermediaries (中間人，金融機構) – – Banks Investment companies Insurance companies Credit unions (信用承擔機構，如國外的純放款公司) Investment Bankers 1 -18

Table 1. 3 Balance Sheet of Commercial Banks 1 -19

Table 1. 4 Balance Sheet of Nonfinancial U. S. Business 1 -20

1. 7 RECENT TRENDS 1 -21

Globalization (全球化議題) Managing foreign exchange (外幣) Diversification to improve performance (多角化改善績效? ) Instruments and vehicles continue to develop (WEBs) Information and analysis improves 1 -22

Figure 1. 1 Global Debt Issue 1 -23

Securitization (證券化) Offers opportunities for investors and originators Changes in financial institutions and regulation Improvement in information capabilities Credit enhancement and its role 1 -24

Figure 1. 2 Asset-backed Securities Outstanding 1 -25

Financial Engineering (財務程) 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 1 -26

Figure 1. 3 Building a Complex Security 1 -27

Unbundling – Mortgage Security 1 -28

Computer Networks Online trading Information made cheaply and widely available Direct trading among investors 1 -29