Problem Set for Investments 9th C1-C5

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PART I

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:inancia1 xqscts rcprcscnt c:Inins to part s or all of that wratn. rln lie ownership of real asset's is distributed among investor%.

u, 2. F'innncial wset s can be ca tegorizcd n f s c d incon11 equity, or dcrivnti~cinstrutucnts. ' s I . . - -. . . .-... C L .,!dvwn ---re,:I C ~ cunsLrucuvn techniqi~csstart with ~LI .FL I ~ ~ il~~ucntion PWIIUI I dwision-thu nUa-;Ition of funds across broad asrd clnsses-and thcn progress to nion: spcrilic sccurity-selection decisions. 3. Compeiition in financial markets leads to n risk-return tnde-off, in u~hiclimurities that offer higher expected ntes of return also impose gwnter risks on inveqtors. The presence of risk however, implies tliat achlal rctums can differ considerably from expected returns at the beginning of ihc investment period. Competition among security analysts also promotes financial markets that arc nenrly informationally efficient. menning tlmt prices reflect nll nvnilable information conceming the vdue of thc security. Passive investment strategies tnny makc sense in nearly efficient markets. 4. Finnncial intermediaries pool investor funds 'md inve%tthen]. Their services are in demand becnuse s n ~ d l investors cannot efficiently gather information. diversify. and monitor portfolios. The financial intermediary sells its own securities to the smoll investors. The intermedinry invests the funds thus mised. uses the proceeds to pay back the small investors. and profits irom the difference (the sl>rend). 5. Investnient banking brings efficiency to corporate fi~nd-raising.Investnient bankers develop expertise in pricing new issues and in marketing them to investors. By the end of 2008. dl the major stand-alone U.S. investment banks had been absorbed into commercial banks or...