Average Process
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Real Assets
Land, buildings, machines and knowledge
Financial assets
Stocks and bonds
Fixed income securities
Fixed stream of income
Equity
Ownership share in a corporation
Derivates
Payoffs that are derermined by the prices of other assets
Options
Call-put
Informal role
Stock prices reflect investors collective assesment
Consumption timing
How you can shift your purchasing power
Allocation of risk
Financial instruments allow investors with the greatest taste for risk to bear that risk
Separation of ownership and management
Ability to buy and sell assets
Agency problems
Managers act on their own
Mechanisms to mitigrate agency problems
Tie managers success to the success of the firm
Corporate governance
Market signals will help to allocate capital efficiently if investors are acting on accurate information
Asset allocation
Choice among broad asset classes
Security selection
Choice of which particular securities to hold within each asset class