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4751 - Financial Economics
Spring 2011
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4751 - Financial Economics
• Name: Rene Schwengber
• Today:
– Syllabus
– Introduction / Review
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Syllabus
• Grade from 4 sources
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20% average homework
25% Midterm (March 4th)
25% group presentation (during the term)
30% Final (May 12th)
• Homework’s typed and stapled
• otherwise cap maximum grade at 75%
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Our Book.
• We will cover material
from other sources too.
• We will generally cover
material on the
whiteboard
Investments, 8th edition
Bodie, Kane and Marcus
Slides by Susan Hine
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Activity
• Part of your grade is based on group work.
• Knowing your group and knowing to work
together in your group is essential.
• Take the next few minutes to introduce
yourself to your classmates.
• Talk about classes you’ve taken,
major/minor.
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Intro
• Investment current commitment of money or
other resources in the expectation of reaping
future benefits
– Intertemporal allocation of resources
• Time (for “risk-free” investments)
• Uncertainty (Risky)
• Examples of risky investment?
– College
• Example of risk-free investment?
– Treasury Bills, Vatican Bonds?
–
Bond Market Says U.S. Debt Is Riskier Than Warren Buffett's Berkshire Hathaway
– The Da Vinci Code (airplane scene)
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Real Assets Versus Financial Assets
• Essential nature of investment
– Reduced current consumption
– Planned later consumption
• Real Assets
– Assets used to produce goods and
services
• Financial Assets
– Claims on real assets
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Example
• Consider the Dutch East India Company
– Fist company to issue Stock (financial asset)
• What is stock?
• (Common) Stock or equity is a claim of ownership on a
firm.
• Payoff of exploration was potentially very big (high
productivity) but so was its risk (e.g. loss ship)
• Idea: Spread risk by financing more than one expedition
(at once or in a given time-frame)
• Many claim this was one of the major forces of growth at
this time
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Investment Example
• The goal of investing in simple:
– Maximize utility
• Assume agents have utility over stream of daily
consumption
– (c1, c2, c3, ….cT ) gives Utility U(c1, c2, c3, …,cT)
• E.g.: Consumption: of (1,1,1,96,1) or
(20,20,20,20,20)
– Most would prefer the 2nd stream of comsumption
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General problem
• A well-developed economy with financial
markets provides:
• intertemporal allocation of resources
• Insurance
– against bad shocks
– decreased volatility
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Next Class
• Review basic concepts from basic
probability theory, linear algebra, etc.
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