Spring 2025, Investments (FIN 346)
Session 2 (Wed, Jan 15)
Announcements
• SmartBook Assignment 1 (Ch 1, 0.5%) is due by 10:00 AM on Fri, Jan 17.
• No class on Mon, Jan 20 in observance of Martin Luther King Jr. Day.
• Typo in the semester schedule about Exam 1. Should be (Ch 1–3, 13, 30%).
• Will update the syllabus with respect to use of artificial intelligence and whether the assign- ments and exams will be on Connect or Blackboard and other typos by next Wednesday.
Update
• As of 7:00 AM today
◦ 72 students in the class: 36 in M003 and 36 in M004
◦ 69 had signed in to the class Blackboard site at least once
◦ 29 had earned some extra credit
◦ 6 had completed SmartBook Assignment 1
◦ 49 had completed ProblemSet Assignment 0
Financial Exchange
• Financial Exchange: Exchange of money today for promise/expectation of money in the future.
◦ Borrow $10,000 today and promise to pay back (with interest) in the future.
◦ Buy stock using $30,000 today with the expectation of getting more money back in the future.
• A financial asset is created (or used) during a financial exchange.
• You would engage in financial exchange only if the utility of what you expect to get back in the future is at least as much as the utility of what you are giving up today.
Real and Financial Assets
• Real Assets: Car, snow blower, house, airplanes, machinery, education, patent, etc.
◦ Real vs financial (BKM), real vs financial and tangible vs intangible (Investopedia).
◦ Investopedia: Real Asset
◦ Investopedia: Financial Asset
◦ Investopedia: Intangible Asset
◦ Investopedia: Intellectual Property
• Financial Assets: Stock, bonds, bank account balances, accounts receivables, prepaid ex- penses, etc.
• This course is about investing in (buying and selling) financial assets (aka securities, financial instruments, financial contracts, etc.).
Financial Institutions and Markets
• Financial institutions (e.g., banks, credit unions, stock brokers, investment bankers, mutual funds, pension funds, insurance companies, etc.) facilitate financial exchange.
• Financial markets are made up of individuals and institutions who trade (engage in financial exchange) with each other.
• Financial markets channel resources (money) to most productive real assets. In the process, they lead to price discovery, i.e., determination of correct values of assets.
• They allow for separation of ownership and management.
Investment Preferences
• Good companies and good investments: Socially Responsible Investing, ESG investing.
• Be skeptical of claims by companies.
• Corporate governance and shareholder activism.
• Generally, if you don’t like what the company is doing, invest in another one.
• Financial Crisis of 2008–2009: Asymmetric information, divergent incentives, hubris. Well explained in the Bird and Fortune videos.
Risk and Expected Return
• Different market participants have different tolerance for risk. Those with high risk tolerance are willing to invest in high-risk securities with higher expected returns while others invest in low-risk securities with low expected returns.
◦ A higher expected return, a higher return on an average, is the reward (compensation) for risk. But there are no guarantees that investing in a high risk security will always lead to a higher average return, even in a very long run. That’s the risk.
Low and High Risk Investments
Low and High Risk Investments
Possible Realizations Of Returns
Growth of $10,000
Another Possible Realizations Of Returns
Growth of $10,000
Investment Mechanics for Individuals
• Open an account with a broker such as Schwab, Fidelity, Vanguard, Robinhood.
◦ In some cases, you may be able to invest without going through a broker. Examples: Mutual funds, https://www.treasurydirect.gov.
• Fund the account by depositing some money.
• Place orders for ETFs, mutual funds, stocks, etc. Later expand to more sophisticated invest- ments.
Investment Decisions
• Asset allocation: How much in different asset classes (risk-free vs risky; risky: stocks, bonds, cash, real estate, crypto, international vs domestic, etc.)
• Security selection: Securities within asset classes (top down) or just selection based on knowl- edge and interest (bottom up).
• Collecting information and analyzing to decide when and how much to invest in each security.
Investing in Competitive Markets
• Prices are correct for the most part. There is very little mispricing. Even if there is, by the time you react to it, it would be too late. Sometimes you will get lucky. Enjoy those moments. Don’t let them go to your head.
• Seinfeld - The Stock Tip.