Investment Bodie Kane Notes

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Study notes of Bodie, Kane & Marcus By Zhipeng Yan Investment Zvi Bodie, Alex Kane and Alan J. Marcus Chapter One: The Investment Environment ....................................................................... 2 Chapter Two: Financial Instruments................................................................................... 4 Chapter Three: How Securities Are Traded........................................................................ 8 Chapter Six: Risk and risk aversion.................................................................................. 12 Chapter Seven: Capital Allocation between the Risky asset and the risk-free Asset ....... 17 Chapter Eight: Optimal Risky…show more content…
If a person is uncertain about the future of GM, he can choose to buy GM’s stock if he is more risk-tolerant, or he can buy GM’s bonds, if he is more conservative. 3. Separation of ownership and management: Let professional managers manage the firm. Owners can easily sell the stocks of the firm if they don’t like the incumbent management team or “police” the managers through board of directors (“stick”) or use compensation plans tie the income of managers to the success of the firm (“carrot”). In some cases, other firms may acquire the firm if they observe the firm is underperforming (market discipline). III. Clients of the financial system 1. Household sector: a. Tax concerns: people in different tax brackets need different financial assets with different tax characteristics. -2- Study notes of Bodie, Kane & Marcus By Zhipeng Yan b. Risk concerns: Differences in risk tolerance create demand for assets with a variety of risk-return combination. 2. Business sector: business is more concerned about how to finance their investments, through debt or equity either privately or publicly. Business issuing securities to the public have several objectives. First, they want to get the best price possible for their securities. Second, they want to market the issues to the public at the lowest possible cost. This has two implications. First, business may hire “specialists” to market their

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