Introduction to Finance

Study Notes

Finance encompasses monetary resources and the study of money, currency, and capital assets.
Key finance activities include investing, borrowing, lending, budgeting, saving, and forecasting.
Three primary types of finance exist: personal finance, corporate finance, and public/government finance.
Distinction from economics: finance focuses on monetary management, while economics examines the production, distribution, and consumption of goods and services.

Financial systems facilitate the buying, selling, and trading of financial assets.
Common financial instruments include currencies, loans, bonds, shares, stocks, options, and futures.
Assets can be banked, invested, and insured to maximize value and minimize loss.
Financial activities inherently involve risks that need to be managed.

Finance studies the movement of money from savers and investors to those needing funds.
Savers and investors can earn interest or dividends by putting their money to productive use.
Individuals, companies, and governments often require external sources, like loans or credit, for insufficient operational funds.

In the 1980s, finance was viewed as a domain with limited applications of bounded rationality.
Efficient markets hypothesis was widely accepted, seen as a cornerstone of economics.
By the early twenty-first century, finance emerged as a significant area benefiting from behavioral economics contributions.

Investment management involves professional management of securities (shares, bonds, real estate, commodities) to achieve specified investment goals.
Investors include institutions (insurance companies, pension funds, corporations) and private individuals, often through collective investment schemes (mutual funds, ETFs, REITs).
Asset allocation is central to investment management, balancing exposure among different asset classes and individual securities according to investment policy.

Portfolio optimization selects the ideal portfolio based on client objectives and constraints.
Fundamental analysis assesses the value of individual securities.
Technical analysis predicts future asset prices using historical data.

Behavioral finance merges behavioral and cognitive psychological theories with traditional economics to explain irrational financial decision-making.
It examines how investor psychology influences financial decisions and market outcomes.
Quantitative behavioral finance employs mathematical and statistical techniques to understand behavioral biases alongside valuation.