Asset Allocation and Investment Types PDF

- **Asset allocation** is the process of deciding how to distribute an investor's wealth among different countries and asset classes for investment purposes. - ***Asset class*** is comprised of securities that have similar characteristics, attributes, and risk/return relationship. A...

- **Asset allocation** is the process of deciding how to distribute an investor's wealth among different countries and asset classes for investment purposes. - ***Asset class*** is comprised of securities that have similar characteristics, attributes, and risk/return relationship. A broad asset class, such as "bonds," can be divided into smaller asset classes, such as treasury bonds, corporate bonds, and high-yield bonds. - ***Treasury bonds*** are long-term debt securities issued by the government to raise money. When you buy a treasury bond, you're essentially lending money to the government in exchange for interest payments. - ***Corporate bonds*** are issued by companies to raise money for business activities, such as expanding their operations or launching new products. - ***High-yield bonds*** are bonds issued by companies that have lower credit ratings, meaning they are considered riskier than other types of bonds. - **Fixed -- income investment** A fixed-income investment is a type of investment where the investor receives regular, predictable interest payments and returns the principal amount (the original amount invested) at maturity. - **Certificate of Deposit (CD)** is a type of fixed-income savings product offered by banks or credit unions. When you purchase a CD, you agree to deposit a certain amount of money for a fixed period (called the term), in exchange for a higher interest rate compared to a regular savings account. - **U.S. Treasury securities** are debt instruments issued by the U.S. Department of the Treasury to help fund government operations and pay off existing debt. - **Municipal bonds** are debt securities issued by **state and local governments**, cities, counties, or other government entities such as school districts, public utilities, and transportation agencies. - **Corporate bond** is a type of debt security issued by a corporation to raise capital for various purposes, such as expanding operations, financing new projects, or refinancing existing debt. - **Indenture** is the legal agreement that lists the obligations of the issuer to the bondholder, including the payment schedule and features such as call provisions and sinking funds. - **A sinking fund** is a requirement for the issuer to set aside funds periodically to repay the bondholders at maturity. - **Call provision** allows the issuer to redeem the bond before its maturity date, usually at a specified premium. - **Secured bonds** are corporate bonds backed by specific assets of the issuing company. - **Mortgage bonds** are a type of secured bond specifically backed by real estate or mortgages. - **Collateral trust bonds** are secured by financial assets, typically stocks or bonds of other companies owned by the issuer. - **Equipment trust certificates** are a type of bond specifically secured by equipment owned by the issuing company. - **Debentures** are promises to pay interest and principal, but they pledgee no specific assets (referred to as collateral) in case the firm does not fulfill its promise. - **Preferred stock** is classified as a fixed -- income security because its yearly payment is stipulated as either a coupon or a stated dollar amount. - **Eurobond** is an international bond denominated in a currency not native to the country where it is issued. - **Common stock** represents ownership of a firm. - **Warrants** are long-term options issued by a company that give the holder the right (but not the obligation) to purchase the company's stock at a specified price (known as the exercise price or strike price) before the warrant expires. - **Puts and Calls option** is similar to a warrant because it is an option to buy the common stock of a company within a certain period at a specified price called the striking price. - **Mutual funds** are also referred to as open-ended funds because they issue "redeemable securities" meaning that the fund stands ready to buy or sell the shares at their net asset value with (a load) or without (no -- load) a transaction fee. - **Closed-end fund (CEF)** is a type of investment fund that raises a fixed amount of capital through an initial public offering (IPO) by issuing a set number of shares. Once the shares are issued, they are traded on a stock exchange like a regular stock, and the fund does not issue new shares or redeem existing shares after the IPO. - **Exchange traded fund (ETF)** is an investment company, typically a mutual fund whose shares are traded intraday on stock exchanges at market determined prices -- in contrast to open -- ended funds that are priced only once a day at the market closing prices. - **Money market funds** are a type of mutual fund that invests in short-term, low-risk debt securities, such as Treasury bills, commercial paper, and certificates of deposit (CDs). - **Bond funds** are mutual funds or ETFs that invest primarily in fixed-income securities, such as government bonds, corporate bonds, municipal bonds, or other debt instruments. These funds aim to provide income through interest payments. - **Common stock funds** are mutual funds or ETFs that primarily invest in equity securities (stocks) of publicly traded companies. These funds focus on capital appreciation through the appreciation of stock prices. - **Balanced funds** are mutual funds or ETFs that invest in a mix of equities (stocks) and fixed-income securities (bonds). The goal is to provide both capital appreciation and income, balancing risk and return. - **Real Estate Investment trusts (REITS)** is an investment fund designed to invest in various real estate properties. It is similar to stocks and bond mutual fund, except that the money provided by the investors is invested in property and buildings rather than in stocks or bonds. - **Direct Real Estate** Investment the most common type of direct real estate investment is the purchase of home, which is the largest investment most people ever make. - **Raw land** another direct real estate investment is the purchase of raw land with the intention of selling it in the future at a profit. - **Land Development** can involve buying raw land, dividing it into individual lots, and building houses on it. - A ***Market*** is the means through which buyers and sellers are brought together to aid in the transfer of goods and services. - ***Liquidity*** is the ability to buy or sell an asset quickly and at a known price -- that is, a price not substantially different from the prices for prior transactions, assuming no new information is available. - **Price continuity** means that the price of an asset stays **relatively stable** between transactions, unless there's important new information that affects its value. - **Depth** means there are **many buyers and sellers** ready to trade at slightly different prices, both higher and lower than the current price. - **Primary market**, the transaction is directly between the **issuer** (like a company or government) and the **buyer** (investor). - **Secondary market**, the transaction is between **investors (customers)**. - **Price discovery** is the process by which the **market determines the price of an asset** based on supply and demand dynamics. - **Secondary markets for U.S government and municipal bonds***,* are platforms where these bonds can be bought and sold after their initial issuance. - The **secondary corporate bond market** refers to the platform where **corporate bonds** (debt securities issued by companies) can be bought and sold after their initial issuance. - The **secondary equity market** is the marketplace where **equity securities**, such as stocks, are bought and sold after they have been initially issued in the primary market. - A **basic trading system** refers to the fundamental framework and processes that enable the buying and selling of financial assets, such as stocks, bonds, or commodities. - **Inflow** of cash means cash is received by the company or there is an increase in amount of cash account. Inflow of cash is also called ***cash receipt.*** - **Outflow** of cash means cash is paid by the company or there is a decrease in the amount of cash account. Outflow of cash also called ***cash payment.*** - **Common size financial statement** is a type of financial analysis that converts each line item of a company\'s balance sheet or income statement to a percentage of a major line item. - **Current ratio** clearly, the best-known liquidity measure is the current ratio, which examines the relationship between current assets and current liabilities. - **Quick ratio**, also known as the **acid-test ratio**, is a financial metric that measures a company's ability to meet its short-term liabilities with its most liquid assets. - ***Efficiency ratios*** examine how the management uses its assets and capital, measured by dollars of sales generated by various asset or capital categories. - ***Profitability ratios*** analyze the profits as a percentage of sales and as a percentage of the assets and capital employed. - **Total Assets Turnover** the total asset turnover ratio indicates the effectiveness of the firm's use of its total asset base (net assets equals gross assets minus depreciation on fixed assets). - The **equity turnover ratio** is a financial metric that measures how efficiently a company uses its shareholders\' equity to generate revenue. - **Risk analysis** examines the uncertainty of income flow for the total firm and for the individual sources of capital (that is, debt, preferred stock, and common stock). - **Business risk** is the uncertainty of operating income caused by the firm's industry.