The Investment Environment

Investment analysis
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A] The Investment Environment
Real assets and financial assets
Typically increased savings and investment result to reduced current consumption as well as planned later consumption. In a balance sheet assets are related of the net worth of a business, and real assets are tangible asserts that determine productive capacity. In comparison financial assets are claims to real assets and include many of the financial securities. As such, financial assets are easily convertible to cash, since the assets are more liquid compared to real assets. The main forms of financial assets are fixed income, equity (common stock) and derivative securities.
Financial markets and the economy
In the digital age, information is more diffused since people are likely to access information through the Google effect (Bodie, Kane & Marcus, 2011). At the same time, consumption timing and allocation of risk influence the decision of investors. For market players in the financial markets, separation of ownership and stewardship are important to improving corporate governance and adhering to corporate ethics. The emergence of corporate scandals resulting from flouting ethics and fraud has highlighted the benefits of corporate governance. As such, the role of watch dogs has a played a prominent role towards improving oversight of companies to ensure that information presented to the public is timely and accurate.
The investment process
The investment process focuses on asset allocation, selection of security and security analysis. Asset allocation is related to making a choice when there is a broad array of asset classes. Investors/ portfolio managers take into account the interaction from risk and return with the aim of managing the investment risk. Asset allocation further delves into investment between safe and risky assets in a portfolio. As such, the choice is made to identify securities which they would wish to hold in the asset class, with the choice dependent on the security analysis. Security analysis highlights on valuation of specific securities that are likely to be included in a portfolio. At other times, investments can be based on a ‘bottom- up’ strategy whereby securities that are attractively priced are chosen with no emphasis on asset allocation (Bodie, Kane & Marcus, 2011).Markets are competitive
Markets are competitive, and analysts have to carefully identify securities that are bargains and undervalued. Even though, investors anticipate returns, the risk and returns are rarely similar to the actual results. Typically, securities with high risk are also likely to have higher returns, but when the price increases the likely returns from these securities is low. As such, the higher risk assets command higher prices because of the risk return trade-off. Diversification is necessary in a portfolio to spread the risk, and since market players may not necessarily have more information than their counterparts. In any case, the financial markets are assumed to be efficient and integrate all the information available to influence the value of securities.The Players
Business firms are typically net borrowers in the financial markets while househ...