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Stark State College *

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46064

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Finance

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Jun 2, 2024

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docx

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4

Uploaded by ChefHawk9246

1 What are the differences between real and financial assets? Real assets  are assets asset directly used to produce goods and services. For example: The land, buildings, equipment, and knowledge. Financial assets  are assets claims on real assets or the income generated by real assets. For Example: Stock, cooperate bonds, treasury bills, etc. Claim of the real asset in the form of a sheet of paper, contract, or computer entities. Do not directly contribute to the productive capacity of the economy. Financial assets are claims to the income generated by real assets. Financial assets define the allocation of income or wealth among investors. Financial assets are more liquid, which means more transparency in pricing because of a well- functioning financial market. Real assets generate profit, then financial assets tell you how to distribute the profit. 2 The average rate of return on investments in large stocks was higher than investments in Treasury bills by about 8% since 1926. Why does anyone invest in Treasury bills? The average rate of return on large stocks has indeed been higher than that on Treasury bills over the long term but the decision to invest in Treasury bills versus stocks depends on an investor's financial goals, risk tolerance, and investment time horizon. While stocks offer higher potential returns, Treasury bills provide  safety stability , and  liquidity , making them an essential component of many investment portfolios. Safety and Stability:  Treasury bills are considered one of the safest investments because they are backed by the U.S. government. There is virtually no risk of default, making them a reliable choice for capital preservation. Liquidity:  Treasury bills are highly liquid, meaning they can be easily bought or sold in the market. This liquidity allows investors to access their funds quickly without much loss in value. Q: 3 The  primary market  is where securities are created, while the  secondary market  is where investors trade those securities. In the primary market, companies sell new stocks and bonds to the public for the first time, such as with an initial public offering (IPO). The secondary market is the stock market and refers to the New York Stock Exchange, the Nasdaq, and other exchanges worldwide. Define each of the following in the context of a business cycle. Peak:  The peak of a cycle is when growth hits its maximum rate. Prices and economic indicators may stabilize for a short period before reversing to the downside. Contraction:  A correction occurs when growth slows, employment falls, and prices stagnate. As demand decreases, businesses may not immediately adjust production levels, leading to oversaturated markets with surplus supply and a downward movement in prices.
Trough:  The trough of the cycle is reached when the economy hits a low point, with supply and demand hitting bottom before recovery. The low point in the cycle represents a painful moment for the economy, with a widespread negative impact from stagnating spending and income Expansion:  During expansion, the economy experiences relatively rapid growth, interest rate tend to be low, and production increases. The economic indicators associated with growth, such as employment and wages, corporate profits and output, aggregate demand, and the supply of goods and services, tend to show sustained uptrends through the expansionary stage. 1 What is the difference between equity and fixed-income securities? A share of ownership in a corporation usually without any guarantee of a fixed return is known as equity. It does not promise any fixed payment. It is usually issued by corporate. In contrast, debts that guarantee a specified return over a specified period of time is known as fixed- income security. It promises either a fixed income or a stream of income that is determined according to a specified formula. It is also issued as bonds by government and financial institutions, other than corporate. 2 what is the difference between a primary asset and a derivative asset The primary asset has a claim on the real assets of a firm. It represents the cash and other investments by aggregating non-claim liabilities. Their value is based on the market value of the asset. A derivative asset provides a payoff that depends on the prices of a primary asset but not the claim on real assets. It is a security with a payoff that depends on the prices of other assets such as bonds or stock prices. Their values are based on the values of other assets Q: what is the difference between asset allocation and security selection? Asset allocation determines the mix of assets held in a portfolio. Asset allocation aims to build a portfolio of non-correlating assets together based on risk and return, minimizing portfolio risk while maximizing returns. Security selection is the process of identifying individual securities.
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