Broadly speaking, there are three types of players in finance: Individuals, Corporations, and Financial Markets. We will look at all three of these players. However, since we cannot look at them in isolation, we will not cover them in sequence. - Individuals who save and invest to smooth consumption across time (save for retirement, borrow to buy a house) or smooth consumption across risk-outcomes (save for a "rainy day," insurance)
What we look at: Portfolio theory
- Corporations who raise money by selling securities (debt, equity), invest in projects (build a factory), and pay investors cash-flows (dividends, interest)
Examples of what we look at:
Capital Budgeting (investing)
Capital Structure (debt or equity)
- Financial Markets that "match" the saving/borrowing needs of individuals with the investing/cash-flow needs of corporations. The term "financial market" is covering a lot of activities. For example, stock exchanges (The NYSE), commercial banks (Mellon), investment banks (Goldman Sachs), real-estate agents (Howard Hanna), are all examples of institutions involved. For much of the course we will not focus on any one institution. Instead, we will get a lot of power from the fact that for every buyer there is a seller. Financial prices (rates of return, interest rates) are not arbitrary, they are the result of lots of smart people reaching an equilibrium so "beating the market" is hard and financial prices convey a lot of information.
Examples of what we look at:
No-arbitrage
Efficient market hypothesis
Capital Asset Pricing Model
(Rev 7/08)
