Background And Review Flashcards
What are real assets?
Assets used to produce goods and services
Can only be classified as an asset on the balance sheet.
What are financial assets?
An asset that gets its value from a contractual right or ownership claim.
Can be easily created or destroyed.
Can be an asset or liability on the balance sheet.
What is the role of financial assets?
Provide information -> about an underlying asset
Time consumption -> consumption can move from one time period to another
Allow for substantial investment in real assets
What is the investment process?
- Decide how much to save -> determined by expectation about future income
- Determine how to invest savings -> asset allocation and security allocation
What is asset allocation?
Allocation across asset classes (e.g. bonds, real estate, equities, etc.)
What is security allocation?
Allocation within asset classes (e.g. what specific type of security -in a class- you want to put money into)
What agents are involved in investment?
Net suppliers of capital, financial intermediaries, and net demanders of capital
Who are the net suppliers of capital?
Individuals/households and government
Who are the financial intermediaries?
Banks, mutual funds, insurance companies, retail stock brokers, investment bankers, etc.
What do banks, mutual funds, and insurance companies do in the investment process?
Channel funds from individuals to firms
What do retail stock brokers do in the investment process?
Execute individuals’ investment decisions
What do investment bankers do in the investment process?
Raise new capital for firms
Who are the net demanders of capital?
Firms and governments
Where do funds from the net suppliers of capital come from?
Savings
Why do the net demanders of capital want to raise funds?
To invest/take up projects
