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금융투자론-1
2024-1 Returns and Risk
What is an Investment?
 Current commitment of money or other resources in the
expectation of reaping future benefit.

Certain Uncertain

◼ (Ex)
◼ Investing in children’s education
◼ Building an automobile manufacturing facility
◼ Saving money at 2% interest rate, 1-year time deposit
account
◼ Buying stocks
 Real Assets vs. Financial Assets

 Real Assets  Financial Assets

 Determine the productive  Claims on real assets, do
capacity and net income not contribute directly to
of the economy the productive capacity
 Examples: land, buildings, of the economy.
machines, knowledge used  Examples: stocks, bonds
to produce
Real Assets

 Real (Physical) Assets:

 Assets that are used to produce goods and services

 Tangible assets: land, buildings and machines

 Intangible assets: technology, human knowledge, brand name

 Traits of Real (Physical) Assets:

 Illiquid

 Depreciates in value over time

 Indivisible
Financial Assets

 Financial Assets:
 Assets that are claims on real assets

 Allocation of income or wealth generated by real assets among investors

is possible.
 Fixed-income securities, Equities, Derivative securities

 Traits of Financial Assets:

 Liquid

 Does not depreciate over time

 Partly divisible
We focus on Financial Assets !!!

• Bond (fixed income security)

• Promise either a fixed stream of income or a stream
of income determined by a specified formula
• Stock (equity)
• Represent an ownership share in the corporation
• Derivative security
• Provide payoffs that are determined by the price of
underlying asset (stock, bond, currency, commodity)
The Investment Process

• Organize your portfolio

• Collection of investment assets

• Asset allocation
• Choice among broad asset classes

• Security selection
• Choice of securities within each asset class
 The Investment Process

• “Top-down” approach
• Asset allocation followed by security analysis to evaluate
which particular securities to be included in the portfolio

• “Bottom-up” approach
• Investment based solely on the price-attractiveness, which
may result in unintended heavy weight of a portfolio in
only one or another sector of the economy
Markets Are Competitive

• Risk-Return Trade-off
• Higher-risk (bad) assets are priced to offer higher
expected returns (good) than lower-risk assets.

• Efficient Markets
• Since prices quickly adjust to all relevant information
, there should be neither underpriced nor overpriced.
Markets Are Competitive

• Passive Management
• Holding a highly diversified portfolio
• No attempt to find undervalued securities
• No attempt to time the market

• Active Management
• Finding mispriced securities
• Timing the market
The Players

• Demanders of capital – Firms

• Suppliers of capital – Households
• Governments – Can be either borrowers or lenders
• Financial Intermediaries: Pool and invest funds
• Investment Companies

• Banks

• Insurance companies

• Credit unions
 Financial Crisis of 2008

• Antecedents of the Crisis:

• “The Great Moderation (1985-
2007)”
A time in which the U.S. had a stable
economy with low interest rates and a
tame business cycle with only mild rec-
essions
• Historic boom in housing market

Note: https://www.federalreservehistory.org/essays/great-moderation
Stock, James; Mark Watson (2002). "Has the business cycle changed and
why?" NBER Macroeconomics Annual. 17: 159–218
 On the brink of crisis

• 2000-2006: Sharp increase in housing prices caused

many investors to believe that continually rising home
prices would bail out bad loans
• 2004: Interest rates began rising
• 2006: Home prices peaked
• 2007: Housing loan defaults and losses on mortgage
-backed securities surged
At the time of crisis

• 2008: Troubled firms include Bear Stearns, Fannie

Mae, Freddie Mac, Merrill Lynch, Lehman Brothers,
and AIG
• Money market breaks down
• Credit markets freeze up
• Federal bailout to stabilize financial system

Note: “Assessing the Costs and Consequences of the 2007–09

Financial Crisis and Its Aftermath,” Federal Reserve Bank of Dallas
 Index (January 2000 = 100)

100
200
250

150

50

0
1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009
The Case-Shiller Index of U.S. Housing Prices

2011

2013
 Changes in Housing Finance
Old Way
 Local thrift institution made mort-
gage loans to homeowners
 Thrift’s major asset: A portfolio of
long-term mortgage loans
 Thrift’s main liability: Deposits
 “Originate to hold”
New Way
 Securitization: Fannie Mae and
Freddie Mac bought mortgage
loans and bundled them into
large pools
 Mortgage-backed securities are
tradable claims against the und-
erlying mortgage pool
 “Originate to distribute”