FINE 2000 Chapter 1-3: FINE 2000 Ch 1-3

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14 Jun 2016

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Definitions: financial intermediaries: an organization that raises money from investors and provides financing for individuals, corporations and other organizations, mutual funds and exchange trade funds(etfs): pools together money from investors to purchase securities. It is a collection of stocks, bonds and other securities that are owns by a group of investors and managed by experienced fund managers. You are simply a unitholder(you buy units of a fund) some advantages are: Built in diversification- diversification is the most important aspect of a portfolio. A well- diversified portfolio can help increased your potential returns and help decrease your overall risk. The more varied your portfolio the lower the portfolio volatility. Liquidity: your investment can be converted to cash at any time: securities: very liquid assets. Equity securities- allows you to own shares of a corporation. The most direct way is to buy stocks of a company.

Related Questions

Respond to the following client statement: a prospective client comes into your office looking for investment advice. The client feels that s/he is appropriately diversified because the portfolio currently holds six different growth mutual funds, hence a large variety of equity securities. Is this diversification? How would you measure diversification between funds? If this prospective client was 32 years old, and the funds in question were part of retirement savings, what would you advise the client in regard to having an adequately diversified mutual fund portfolio? In addition to discussing the diversification, how would you propose this portfolio be managed so that it is most tax efficient for the client? Discuss tax considerations and strategies.

Pension plans provide a savings plan for employees that can be used for retirement. The amount of money in the fund grows in four ways: (1) new contributions by the employee, (2) new contributions by the employer on behalf of the employee, (3) dividends or interest earned by the fund due to its investment in equity or debt securities, and (4) appreciation in the values (capital gains) of the securities in which the fund has invested. In aggregate, most of the contributions come from the employer. Pension funds are major investors in stocks, bonds, and various types of loan packages such as mortgage-backed securities.

What role do you think insurance companies play when it comes to pension funds and financial planning?

Explain the differences between diversification and asset allocation.

Which is more important in portfolio management?

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Many businesses find it generally more efficient to enlist the services of a financial institution when it comes time to raise capital: IE. Investment Banks: An organization that underwrites and distributes new investment securities and helps business obtain financing. Commercial Banks: The traditional department store type of financing serving a variety of savers and borrowers. Financial Service Corporations: A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking. Credit Unions: Cooperative association whose members have a common bond such as employees of the same firm. Pension Funds: Retirement plans funded by corporations or government agencies. Life Insurance Companies: Take annual premium payments and invest these funds in stocks, bonds, or real estate and make payments to beneficiaries of the insured parties. Mutual Funds: Corporations that accept money from savers and then use these funds to buy stocks, long-term bonds, or short-term debt issued by business or government. They typically pool funds to reduce risk by diversification. Exchange Traded Funds (ETFs): Buy a portfolio of stocks of a certain type of business sector. IE. media companies, oil companies, Chinese companies, etc. and then sell their own shares to the public. Hedge Funds: Not regulated by the Securities and Exchange Commission (SEC). Typically have large minimum investments of over $1 million and marketed to individuals an institutions with high net worth. Private Equity Companies: Target, buy, and then manage entire firms. Most of the money used to buy these companies is borrowed. Why are the various financial instruments considered claims against a company's future cash flows ?

FINE 2000 Chapter 1-3: FINE 2000 Ch 1-3

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