Real assets create wealth. Financial assets represent claims to parts or all of that wealth.
Financial assets determine how the ownership of real assets is distributed among
investors.
Financial assets can be categorized as fixed income (debt), equity, or derivative instruments.
Top-down portfolio construction techniques start with the asset allocation decision—the allocation of funds across broad asset classes—and then progress to more specific security-selection decisions.
Competition in financial markets leads to a risk-return trade-off, in which securities that
offer higher expected rates of return also impose greater risks on investors. The presence
of risk, however, implies that actual returns can differ considerably from expected returns
at the beginning of the investment period. Competition among security analysts also
results in financial markets that are nearly informationally efficient, meaning that prices
reflect all available information concerning the value of the security. Passive investment
strategies may make sense in nearly efficient markets.
Financial intermediaries pool investor funds and invest them. Their services are in demand
because small investors cannot efficiently gather information, diversify, and monitor portfolios.
The financial intermediary, in contrast, is a large investor that can take advantage of
scale economies.
Investment banking brings efficiency to corporate fund raising. Investment bankers
develop expertise in pricing new issues and in marketing them to investors.
Recent trends in financial markets include globalization, securitization, financial engineering
of assets, and growth of information and computer networks.
