Unit 2: FinancialInvestment Financial English Unit 2: Revision of Unit 1Revision of Unit 1Revision of Unit 1Revision of Unit 1 Overview of Unit 2Overview.

Unit 2:Unit 2:

FinancialFinancial

InvestmentInvestment

Financial EnglishFinancial English

Unit 2:Unit 2:

• Revision of Unit 1

• Overview of Unit 2

• Background information of Unit 2

• Text

• ExercisesExercises

• AssignmentsAssignments

Review of Unit 1Review of Unit 1

• Exercises Check-upExercises Check-up

Question & Answer

Sentence Translation

Revision of Unit 1Revision of Unit 1

Question &AnswerQuestion &Answer

1. What is the financial market?1. What is the financial market?

2. What does financial market facilitate?2. What does financial market facilitate?

3. What are the main types of financial market?3. What are the main types of financial market?

4. What is the purpose of financial market?4. What is the purpose of financial market?

5. Who are the main borrowers in financial market?5. Who are the main borrowers in financial market?

Check-upCheck-up

Check-upCheck-up

Answer the following questions according to the text in Unit 1Answer the following questions according to the text in Unit 1

Key to the questions:Key to the questions:

1.1. A financial market is a mechanism that allows A financial market is a mechanism that allows people to easily buy and sell (trade) financial people to easily buy and sell (trade) financial securities (such as stocks and bonds), securities (such as stocks and bonds), commodities (such as precious metals or commodities (such as precious metals or agricultural goods), and other fungible items of agricultural goods), and other fungible items of value at low transaction costs and at prices that value at low transaction costs and at prices that reflect the efficient-market hypothesis.reflect the efficient-market hypothesis.

2.2. The raising of capital ;the transfer of risk and The raising of capital ;the transfer of risk and international trade.international trade.

Question and AnswerQuestion and Answer

3.3. Capital markets, commodity markets, Capital markets, commodity markets, money markets, derivative markets, money markets, derivative markets, insurance markets and foreign exchange insurance markets and foreign exchange markets .markets .

4. Financial markets fit in the relationship 4. Financial markets fit in the relationship between lenders and borrowers.between lenders and borrowers.

5.5. Individuals, companies, governments, Individuals, companies, governments, municipalities and public corporations.municipalities and public corporations.

Question and AnswerQuestion and Answer

Translate the following sentences orally

Sentence TranslationSentence Translation

1. 1. Financial markets go by many terms, including capital Financial markets go by many terms, including capital

markets, Wall Street, even the markets. Some experts even markets, Wall Street, even the markets. Some experts even

simply refer to it as the stock market, even though they are simply refer to it as the stock market, even though they are

referring to stocks, bonds and commodities.referring to stocks, bonds and commodities.

2. Futures also increase the trader’s leverage by allowing him to 2. Futures also increase the trader’s leverage by allowing him to

borrow the money to purchase the commodity. This can have borrow the money to purchase the commodity. This can have

a huge impact on the stock market if the trader guesses a huge impact on the stock market if the trader guesses

wrong.wrong.

1. 1. Financial markets go by many terms, including capital Financial markets go by many terms, including capital

markets, Wall Street, even the markets. Some experts even markets, Wall Street, even the markets. Some experts even

simply refer to it as the stock market, even though they are simply refer to it as the stock market, even though they are

referring to stocks, bonds and commodities.referring to stocks, bonds and commodities.

2. Futures also increase the trader’s leverage by allowing him to 2. Futures also increase the trader’s leverage by allowing him to

borrow the money to purchase the commodity. This can have borrow the money to purchase the commodity. This can have

a huge impact on the stock market if the trader guesses a huge impact on the stock market if the trader guesses

wrong.wrong.Check-upCheck-up


3. Russian experts say that the economic potential of the nation 3. Russian experts say that the economic potential of the nation

will let the country survive the financial crisis without will let the country survive the financial crisis without

considerable losses. The Russian economy today is a lot considerable losses. The Russian economy today is a lot

bigger than it used to be ten years ago.bigger than it used to be ten years ago.

4. Hedge funds, credit default swaps, can be legitimate 4. Hedge funds, credit default swaps, can be legitimate

instruments when trying to insure against whether someone instruments when trying to insure against whether someone

will default or not, but the problem came about when the will default or not, but the problem came about when the

market became more speculative in nature.market became more speculative in nature.

3. Russian experts say that the economic potential of the nation 3. Russian experts say that the economic potential of the nation

will let the country survive the financial crisis without will let the country survive the financial crisis without

considerable losses. The Russian economy today is a lot considerable losses. The Russian economy today is a lot

bigger than it used to be ten years ago.bigger than it used to be ten years ago.

4. Hedge funds, credit default swaps, can be legitimate 4. Hedge funds, credit default swaps, can be legitimate

instruments when trying to insure against whether someone instruments when trying to insure against whether someone

will default or not, but the problem came about when the will default or not, but the problem came about when the

market became more speculative in nature.market became more speculative in nature.

Check-upCheck-up


5. The extent of the problems has been so severe that some of 5. The extent of the problems has been so severe that some of

the world’s largest financial institutions have collapsed. the world’s largest financial institutions have collapsed.

Others have been bought out by their competition at low Others have been bought out by their competition at low

prices and in other cases, the governments of the wealthiest prices and in other cases, the governments of the wealthiest

nations in the world have resorted to extensive bail-out and nations in the world have resorted to extensive bail-out and

rescue packages for the remaining large banks and financial rescue packages for the remaining large banks and financial

institutions.institutions.

5. The extent of the problems has been so severe that some of 5. The extent of the problems has been so severe that some of

the world’s largest financial institutions have collapsed. the world’s largest financial institutions have collapsed.

Others have been bought out by their competition at low Others have been bought out by their competition at low

prices and in other cases, the governments of the wealthiest prices and in other cases, the governments of the wealthiest

nations in the world have resorted to extensive bail-out and nations in the world have resorted to extensive bail-out and

rescue packages for the remaining large banks and financial rescue packages for the remaining large banks and financial

institutions.institutions.

Check-upCheck-up

Sentence Translation—Suggested AnswersSentence Translation—Suggested Answers

1. 金融市场包括很多方面，包括资本市场，华尔街，甚至是市场本身。一些专家简单的将股票市场成为金融市场，尽管市场实际上包括股票市场、债券市场和商品市场。

2. 期货允许投资者借贷资金购买商品从而增加交易者的投资杠杆。如果交易者预测有误，这将对股票市场产生巨大影响。

1. 金融市场包括很多方面，包括资本市场，华尔街，甚至是市场本身。一些专家简单的将股票市场成为金融市场，尽管市场实际上包括股票市场、债券市场和商品市场。

2. 期货允许投资者借贷资金购买商品从而增加交易者的投资杠杆。如果交易者预测有误，这将对股票市场产生巨大影响。


3. 俄罗斯的专家称，国家的经济潜力将使得国家不必遭受相当大的经济损失就可以渡过经济危机。如今的俄国经济比十年前要强很多。

4. 在试图确认某人是否会违约的时候，对冲基金和违约信用交换会是合法的工具，但是在市场自然而然变得投机性越来越强时问题就会显现出来。

3. 俄罗斯的专家称，国家的经济潜力将使得国家不必遭受相当大的经济损失就可以渡过经济危机。如今的俄国经济比十年前要强很多。

4. 在试图确认某人是否会违约的时候，对冲基金和违约信用交换会是合法的工具，但是在市场自然而然变得投机性越来越强时问题就会显现出来。


5. 问题已经到了越来越严重的程度，以致于一些世界最大型的金融机构已经垮台。其他一些则被其竞争对手以低价收购。在另一些情况下，一些世界上最富有国家的政府也通过大量以优先股给股东分红或者出台救市计划来挽救现存的大型银行和金融机构。

5. 问题已经到了越来越严重的程度，以致于一些世界最大型的金融机构已经垮台。其他一些则被其竞争对手以低价收购。在另一些情况下，一些世界上最富有国家的政府也通过大量以优先股给股东分红或者出台救市计划来挽救现存的大型银行和金融机构。

Overview of Unit 2Overview of Unit 2

本章旨在本章旨在通过对金融投资机构、投资组合以及投机者市场关系的介绍让学生对金融投资有初步概念，

并了解其中一些相关理论。

本章重点难点本章重点难点什么是金融中介机构

什么是投资组合

如何看资产负债表

投机者与市场的关系

本章旨在本章旨在通过对金融投资机构、投资组合以及投机者市场关系的介绍让学生对金融投资有初步概念，

并了解其中一些相关理论。

本章重点难点本章重点难点什么是金融中介机构

什么是投资组合

如何看资产负债表

投机者与市场的关系

Overview of Unit 2Overview of Unit 2

After learning this unit, you should acquire:

What is financial intermediary

What is a portfolio choice

How to read a banlance sheet

The relationship between speculators and the market

共有基金共有基金 (mutual fund)(mutual fund) 共有基金是一个投资公司集结了众多共有基金是一个投资公司集结了众多投资人的资金，然后由财务管理专家依照该共有基金的投资方投资人的资金，然后由财务管理专家依照该共有基金的投资方向而投资于美国或其它国家的金融和证券市场，其投资的组合向而投资于美国或其它国家的金融和证券市场，其投资的组合可能包括股票，债券，银行定期存款可能包括股票，债券，银行定期存款 ,, 货币市场工具货币市场工具 ,, 贵重金贵重金属和房地产等。股票型共有基金投资于股票市场，债券型共有属和房地产等。股票型共有基金投资于股票市场，债券型共有基金投资于债券，也有一部分共有基金的投资涵盖了股票，债基金投资于债券，也有一部分共有基金的投资涵盖了股票，债券，贵重金属，房地产等。一般而言，共有基金的投资种类和券，贵重金属，房地产等。一般而言，共有基金的投资种类和百分比依基金公司的目标与策略的不同而有差异。投资者参与百分比依基金公司的目标与策略的不同而有差异。投资者参与投资共有基金时，即拥有该共有基金的部分所有权，你需要付投资共有基金时，即拥有该共有基金的部分所有权，你需要付出它的净资产价（出它的净资产价（ NetAssetValveNetAssetValve ，， NVA)NVA) ，加上所需的销售，加上所需的销售价（价（ SalesloadsSalesloads ）。当你买入基金后，那些基金管理费也是由）。当你买入基金后，那些基金管理费也是由你付出。你付出。

Background InformationBackground Information


共有基金的投资者可借助两种方式获利共有基金的投资者可借助两种方式获利：收取所投资本：收取所投资本

的股息和利息收入，或籍所持证券的升值使投资升值。的股息和利息收入，或籍所持证券的升值使投资升值。

股息、利息及出售证券所得之收盈股息、利息及出售证券所得之收盈 (( 资本利得资本利得 )) 以收益分以收益分

配的形式返还投资者。总体而言，任何投资者有权在任配的形式返还投资者。总体而言，任何投资者有权在任

何时间，以所投资基金之当日收盘价出售何时间，以所投资基金之当日收盘价出售 (( 可赎回可赎回 )) 所持所持

股份。股份。

共有基金的投资者可借助两种方式获利共有基金的投资者可借助两种方式获利：收取所投资本：收取所投资本

的股息和利息收入，或籍所持证券的升值使投资升值。的股息和利息收入，或籍所持证券的升值使投资升值。

股息、利息及出售证券所得之收盈股息、利息及出售证券所得之收盈 (( 资本利得资本利得 )) 以收益分以收益分

配的形式返还投资者。总体而言，任何投资者有权在任配的形式返还投资者。总体而言，任何投资者有权在任

何时间，以所投资基金之当日收盘价出售何时间，以所投资基金之当日收盘价出售 (( 可赎回可赎回 )) 所持所持

股份。股份。


资产负债表资产负债表 (Balance Sheet)(Balance Sheet) ，亦称财务状况表（，亦称财务状况表（ StatStat

ement of financial positionement of financial position ））

按照有关统计，美国大约有按照有关统计，美国大约有 93%93% 的企业将这张报表的企业将这张报表称为“资产负债表”（称为“资产负债表”（ Balance SheetBalance Sheet ），另外，还有极），另外，还有极少数的企业称其为“财务状况表”（少数的企业称其为“财务状况表”（ Statement of financStatement of financ

ial positionial position ））

资产负债表资产负债表 (Balance Sheet)(Balance Sheet) ，亦称财务状况表（，亦称财务状况表（ StatStat

ement of financial positionement of financial position ））

按照有关统计，美国大约有按照有关统计，美国大约有 93%93% 的企业将这张报表的企业将这张报表称为“资产负债表”（称为“资产负债表”（ Balance SheetBalance Sheet ），另外，还有极），另外，还有极少数的企业称其为“财务状况表”（少数的企业称其为“财务状况表”（ Statement of financStatement of financ

ial positionial position ））

Unit 2:Unit 2:

• Part I:Part I: 2.1 Introduction

• Part II: Part II: 2.2 Financial Intermediaries

• Part III:Part III: 2.3 Portfolio Choice

• Part IV:Part IV: 2.4 Speculators and Markets

Financial InvestmentFinancial Investment

2.1 Introduction2.1 Introduction

In finance, investment is the commitment of funds by buying In finance, investment is the commitment of funds by buying

securities or other monetary or paper (financial) assets in the securities or other monetary or paper (financial) assets in the

money markets or capital markets, or in fairly liquid real assets, money markets or capital markets, or in fairly liquid real assets,

such as gold, real estate, or collectibles. Valuation is the method such as gold, real estate, or collectibles. Valuation is the method

for assessing whether a potential investment is worth its price. for assessing whether a potential investment is worth its price.

Returns on investments will follow the risk-return spectrum.Returns on investments will follow the risk-return spectrum.

Text :Text :

Types of financial investments include shares, other equity Types of financial investments include shares, other equity

investment, and bonds (including bonds denominated in foreign investment, and bonds (including bonds denominated in foreign

currencies). These financial assets are then expected to provide currencies). These financial assets are then expected to provide

income or positive future cash flows, and may increase or income or positive future cash flows, and may increase or

decrease in value giving the investor capital gains or losses.decrease in value giving the investor capital gains or losses.

Text :Text :

Text :Text :

Investments are often made indirectly through Investments are often made indirectly through

intermediaries, such as banks, mutual funds, pension funds,, such as banks, mutual funds, pension funds,

insurance companies, collective investment schemes, and i insurance companies, collective investment schemes, and i

nvestment clubs. Though their legal and procedural details nvestment clubs. Though their legal and procedural details

differ, an intermediary generally makes an investment usindiffer, an intermediary generally makes an investment usin

g money from many individuals, each of whom receives a g money from many individuals, each of whom receives a

claim on the intermediary.claim on the intermediary.

Investments are often made indirectly through Investments are often made indirectly through

intermediaries, such as banks, mutual funds, pension funds,, such as banks, mutual funds, pension funds,

insurance companies, collective investment schemes, and i insurance companies, collective investment schemes, and i

nvestment clubs. Though their legal and procedural details nvestment clubs. Though their legal and procedural details

differ, an intermediary generally makes an investment usindiffer, an intermediary generally makes an investment usin

g money from many individuals, each of whom receives a g money from many individuals, each of whom receives a

claim on the intermediary.claim on the intermediary.

Text :Text :

2.2 Financial Intermediaries

Most people do not enter financial markets directly but Most people do not enter financial markets directly but

use intermediaries or middlemen. Commercial banks are use intermediaries or middlemen. Commercial banks are

the financial intermediary we meet most often in the financial intermediary we meet most often in

macroeconomics, but mutual funds, pension funds, credit

unions, savings and loan associations, and to some extent

insurance companies are also important financial

intermediaries.

2.2 Financial Intermediaries

Most people do not enter financial markets directly but Most people do not enter financial markets directly but

use intermediaries or middlemen. Commercial banks are use intermediaries or middlemen. Commercial banks are

the financial intermediary we meet most often in the financial intermediary we meet most often in

macroeconomics, but mutual funds, pension funds, credit

unions, savings and loan associations, and to some extent

insurance companies are also important financial

intermediaries.

Text :Text :

When people deposit money in a bank, the bank uses When people deposit money in a bank, the bank uses

the funds to make loans to home buyers for mortgages, to the funds to make loans to home buyers for mortgages, to

students so they can pay for their education, to business to students so they can pay for their education, to business to

finance inventories, and to anyone else who needs to finance inventories, and to anyone else who needs to

borrow. A person who has extra money could, of course, borrow. A person who has extra money could, of course,

seek out borrowers himself and bypass the intermediary. By seek out borrowers himself and bypass the intermediary. By

eliminating the eliminating the middleman, the saver could get a higher

return. Why, then, do so many people use financial

intermediaries?

When people deposit money in a bank, the bank uses When people deposit money in a bank, the bank uses

the funds to make loans to home buyers for mortgages, to the funds to make loans to home buyers for mortgages, to

students so they can pay for their education, to business to students so they can pay for their education, to business to

finance inventories, and to anyone else who needs to finance inventories, and to anyone else who needs to

borrow. A person who has extra money could, of course, borrow. A person who has extra money could, of course,

seek out borrowers himself and bypass the intermediary. By seek out borrowers himself and bypass the intermediary. By

eliminating the eliminating the middleman, the saver could get a higher

return. Why, then, do so many people use financial

intermediaries?

Text :Text :

TWO ADVANTAGES PROVIDED TO THE SAVERSTWO ADVANTAGES PROVIDED TO THE SAVERS

Financial intermediaries provide TWOTWO important

advantages to savers.

TWO ADVANTAGES PROVIDED TO THE SAVERSTWO ADVANTAGES PROVIDED TO THE SAVERS

Financial intermediaries provide TWOTWO important

advantages to savers.

Text :Text :

First, lending through an intermediary is usually less risky First, lending through an intermediary is usually less risky

than lending directly. The major reason for reduced risk is that than lending directly. The major reason for reduced risk is that

a financial intermediary can a financial intermediary can diversify. It makes a great many

loans, and even though some of those loans will be mistakes,

the losses will be largely offset by loans that are sound. In

contrast, an average saver could directly make only a few

loans, and any bad loans would substantially affect his wealth.

Because an intermediary can put its "eggs" in many "baskets,"

it insures its depositors from substantial losses.

First, lending through an intermediary is usually less risky First, lending through an intermediary is usually less risky

than lending directly. The major reason for reduced risk is that than lending directly. The major reason for reduced risk is that

a financial intermediary can a financial intermediary can diversify. It makes a great many

loans, and even though some of those loans will be mistakes,

the losses will be largely offset by loans that are sound. In

contrast, an average saver could directly make only a few

loans, and any bad loans would substantially affect his wealth.

Because an intermediary can put its "eggs" in many "baskets,"

it insures its depositors from substantial losses.

Text :Text :

Another reason financial intermediaries reduce risk is that by Another reason financial intermediaries reduce risk is that by

making many loans, they learn how to better predict which of the making many loans, they learn how to better predict which of the

people who want to borrow money will be able to repay. Someone people who want to borrow money will be able to repay. Someone

who does not specialize in this lending may be a poor judge of who does not specialize in this lending may be a poor judge of

which loans are worth making and which are not, though even a which loans are worth making and which are not, though even a

specialist will make some mistakes.specialist will make some mistakes.

Another reason financial intermediaries reduce risk is that by Another reason financial intermediaries reduce risk is that by

making many loans, they learn how to better predict which of the making many loans, they learn how to better predict which of the

people who want to borrow money will be able to repay. Someone people who want to borrow money will be able to repay. Someone

who does not specialize in this lending may be a poor judge of who does not specialize in this lending may be a poor judge of

which loans are worth making and which are not, though even a which loans are worth making and which are not, though even a

specialist will make some mistakes.specialist will make some mistakes.

Text :Text :

A second advantage financial intermediaries give savers is A second advantage financial intermediaries give savers is

liquidity. Liquidity is the ability to liquidity. Liquidity is the ability to convert assets into a spendable

form—money—quickly. A house is an illiquid asset; selling one

can take a great deal of time. If an individual saver has lent money

directly to another person, the loan can also be an illiquid asset. If

the lender suddenly needs cash, he must either persuade the

borrower to repay quickly, which may not be possible, or he must

find someone else who will buy the loan from him, which may be

very difficult.

A second advantage financial intermediaries give savers is A second advantage financial intermediaries give savers is

liquidity. Liquidity is the ability to liquidity. Liquidity is the ability to convert assets into a spendable

form—money—quickly. A house is an illiquid asset; selling one

can take a great deal of time. If an individual saver has lent money

directly to another person, the loan can also be an illiquid asset. If

the lender suddenly needs cash, he must either persuade the

borrower to repay quickly, which may not be possible, or he must

find someone else who will buy the loan from him, which may be

very difficult.

Text :Text :

Although the intermediary may use its funds to make illiquid Although the intermediary may use its funds to make illiquid

loans, its size allows it to hold some funds loans, its size allows it to hold some funds idle as cash to

provide liquidity to individual depositors. Only when a great

many depositors want to withdraw deposits at the same time,

which happens when there is a "run" on the institution, will the

financial intermediary be unable to provide liquidity. Unless it

can obtain help from the government or other institutions, it

will be forced to suspend payments to depositors.

Although the intermediary may use its funds to make illiquid Although the intermediary may use its funds to make illiquid

loans, its size allows it to hold some funds loans, its size allows it to hold some funds idle as cash to

provide liquidity to individual depositors. Only when a great

many depositors want to withdraw deposits at the same time,

which happens when there is a "run" on the institution, will the

financial intermediary be unable to provide liquidity. Unless it

can obtain help from the government or other institutions, it

will be forced to suspend payments to depositors.

Text :Text :

A SOURCE OF SHOCKS AND BUMPS TO THE A SOURCE OF SHOCKS AND BUMPS TO THE

ECONOMYECONOMY

In addition to lending money to individuals and groups, there In addition to lending money to individuals and groups, there

are other ways in which banks are part of financial markets. Banks are other ways in which banks are part of financial markets. Banks

borrow and lend funds among themselves in the federal-funds borrow and lend funds among themselves in the federal-funds

market. They buy and sell foreign exchange. They buy and sell market. They buy and sell foreign exchange. They buy and sell

government and commercial debt. And finally, one form of bank government and commercial debt. And finally, one form of bank

debt serves as money in modern economies, and banks create this debt serves as money in modern economies, and banks create this

debt as a result of their financial transactions.debt as a result of their financial transactions.

A SOURCE OF SHOCKS AND BUMPS TO THE A SOURCE OF SHOCKS AND BUMPS TO THE

ECONOMYECONOMY

In addition to lending money to individuals and groups, there In addition to lending money to individuals and groups, there

are other ways in which banks are part of financial markets. Banks are other ways in which banks are part of financial markets. Banks

borrow and lend funds among themselves in the federal-funds borrow and lend funds among themselves in the federal-funds

market. They buy and sell foreign exchange. They buy and sell market. They buy and sell foreign exchange. They buy and sell

government and commercial debt. And finally, one form of bank government and commercial debt. And finally, one form of bank

debt serves as money in modern economies, and banks create this debt serves as money in modern economies, and banks create this

debt as a result of their financial transactions.debt as a result of their financial transactions.

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Economists are concerned that financial intermediaries can be a Economists are concerned that financial intermediaries can be a

source of shocks to the economy, bumps that can disrupt the source of shocks to the economy, bumps that can disrupt the

normal flow of economic life. This concern arises for at least two normal flow of economic life. This concern arises for at least two

reasons. First, bank debt serves as money, so disruptions to banks reasons. First, bank debt serves as money, so disruptions to banks

can affect the amount of money in circulation. Second, financial can affect the amount of money in circulation. Second, financial

intermediaries are tied together through chains of debts and assets. intermediaries are tied together through chains of debts and assets.

Economists are concerned that financial intermediaries can be a Economists are concerned that financial intermediaries can be a

source of shocks to the economy, bumps that can disrupt the source of shocks to the economy, bumps that can disrupt the

normal flow of economic life. This concern arises for at least two normal flow of economic life. This concern arises for at least two

reasons. First, bank debt serves as money, so disruptions to banks reasons. First, bank debt serves as money, so disruptions to banks

can affect the amount of money in circulation. Second, financial can affect the amount of money in circulation. Second, financial

intermediaries are tied together through chains of debts and assets. intermediaries are tied together through chains of debts and assets.

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Because of these linkages, the failure of one financial Because of these linkages, the failure of one financial

intermediary can weaken others, increasing their chances of intermediary can weaken others, increasing their chances of

failure. As a result, there is the possibility that if a key financial failure. As a result, there is the possibility that if a key financial

intermediary fails, that failure can create a domino effect that intermediary fails, that failure can create a domino effect that

could cause other financial institutions to fail, ultimately could cause other financial institutions to fail, ultimately

causing the financial sector to "seize up" and stop functioning. causing the financial sector to "seize up" and stop functioning.

Serious disruption of the financial markets will disrupt the rest Serious disruption of the financial markets will disrupt the rest

of the economy. of the economy.

Because of these linkages, the failure of one financial Because of these linkages, the failure of one financial

intermediary can weaken others, increasing their chances of intermediary can weaken others, increasing their chances of

failure. As a result, there is the possibility that if a key financial failure. As a result, there is the possibility that if a key financial

intermediary fails, that failure can create a domino effect that intermediary fails, that failure can create a domino effect that

could cause other financial institutions to fail, ultimately could cause other financial institutions to fail, ultimately

causing the financial sector to "seize up" and stop functioning. causing the financial sector to "seize up" and stop functioning.

Serious disruption of the financial markets will disrupt the rest Serious disruption of the financial markets will disrupt the rest

of the economy. of the economy.

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2.3 Portfolio Choice2.3 Portfolio Choice

CHARACTERISTICS OF FINANCIAL ASSETSCHARACTERISTICS OF FINANCIAL ASSETS

Portfolio choice involves decisions about the way we want to

hold our assets (or to structure our liabilities). It is a fancy term for

something we do all the time. For example, a yard sale is an

example of portfolio adjustment. People holding a yard sale are

attempting to convert assets in the form clothing and household

items into cash. They are not changing the amount of assets they

have, but rather the form in which they hold them.

2.3 Portfolio Choice2.3 Portfolio Choice

CHARACTERISTICS OF FINANCIAL ASSETSCHARACTERISTICS OF FINANCIAL ASSETS

Portfolio choice involves decisions about the way we want to

hold our assets (or to structure our liabilities). It is a fancy term for

something we do all the time. For example, a yard sale is an

example of portfolio adjustment. People holding a yard sale are

attempting to convert assets in the form clothing and household

items into cash. They are not changing the amount of assets they

have, but rather the form in which they hold them.

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From a macroeconomic perspective, most important cases From a macroeconomic perspective, most important cases

of portfolio adjustment involve financial assets. When we look of portfolio adjustment involve financial assets. When we look

at financial assets, there are three characteristics that most at financial assets, there are three characteristics that most

people want to have in their assets. First, they like assets with people want to have in their assets. First, they like assets with

low risk. Second, they want assets that are liquid, assets that low risk. Second, they want assets that are liquid, assets that

can easily be converted to money and spent. Third, they like can easily be converted to money and spent. Third, they like

assets that give them a high rate of return. Because no asset assets that give them a high rate of return. Because no asset

combines all three characteristics, people face tradeoffs. combines all three characteristics, people face tradeoffs.

From a macroeconomic perspective, most important cases From a macroeconomic perspective, most important cases

of portfolio adjustment involve financial assets. When we look of portfolio adjustment involve financial assets. When we look

at financial assets, there are three characteristics that most at financial assets, there are three characteristics that most

people want to have in their assets. First, they like assets with people want to have in their assets. First, they like assets with

low risk. Second, they want assets that are liquid, assets that low risk. Second, they want assets that are liquid, assets that

can easily be converted to money and spent. Third, they like can easily be converted to money and spent. Third, they like

assets that give them a high rate of return. Because no asset assets that give them a high rate of return. Because no asset

combines all three characteristics, people face tradeoffs. combines all three characteristics, people face tradeoffs.

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If they want a higher return, they usually have to accept more risIf they want a higher return, they usually have to accept more ris

k or less liquidity. For example, over the past half century the avek or less liquidity. For example, over the past half century the ave

rage return on holding common stocks has been higher than the rrage return on holding common stocks has been higher than the r

eturn on holding passbook savings in a bank. However, the high eturn on holding passbook savings in a bank. However, the high

average return on common stocks is the result of some stocks peraverage return on common stocks is the result of some stocks per

forming very well while others perform poorly. Investment in stoforming very well while others perform poorly. Investment in sto

cks can be quite risky. cks can be quite risky.

If they want a higher return, they usually have to accept more risIf they want a higher return, they usually have to accept more ris

k or less liquidity. For example, over the past half century the avek or less liquidity. For example, over the past half century the ave

rage return on holding common stocks has been higher than the rrage return on holding common stocks has been higher than the r

eturn on holding passbook savings in a bank. However, the high eturn on holding passbook savings in a bank. However, the high

average return on common stocks is the result of some stocks peraverage return on common stocks is the result of some stocks per

forming very well while others perform poorly. Investment in stoforming very well while others perform poorly. Investment in sto

cks can be quite risky. cks can be quite risky.

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BALANCE SHEETBALANCE SHEET

Many issues in portfolio choice can be illustrated with a Many issues in portfolio choice can be illustrated with a balance sheet. A balance sheet is based on the definition of net balance sheet. A balance sheet is based on the definition of net worth or wealth:worth or wealth:

(1) Net Worth = Assets - Liabilities(1) Net Worth = Assets - Liabilities

An asset is what one owns and a liability is what one owes. An asset is what one owns and a liability is what one owes. Using very elementary algebra, one can rewrite this equation as:Using very elementary algebra, one can rewrite this equation as:

(2) Assets = Net Worth + Liabilities(2) Assets = Net Worth + Liabilities

Since this equation is based on a definition, the right-hand and Since this equation is based on a definition, the right-hand and left-hand sides must equal each other or balance, and hence the left-hand sides must equal each other or balance, and hence the name balance sheet.name balance sheet.

BALANCE SHEETBALANCE SHEET

Many issues in portfolio choice can be illustrated with a Many issues in portfolio choice can be illustrated with a balance sheet. A balance sheet is based on the definition of net balance sheet. A balance sheet is based on the definition of net worth or wealth:worth or wealth:

(1) Net Worth = Assets - Liabilities(1) Net Worth = Assets - Liabilities

An asset is what one owns and a liability is what one owes. An asset is what one owns and a liability is what one owes. Using very elementary algebra, one can rewrite this equation as:Using very elementary algebra, one can rewrite this equation as:

(2) Assets = Net Worth + Liabilities(2) Assets = Net Worth + Liabilities

Since this equation is based on a definition, the right-hand and Since this equation is based on a definition, the right-hand and left-hand sides must equal each other or balance, and hence the left-hand sides must equal each other or balance, and hence the name balance sheet.name balance sheet.

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Balance sheets provide a precise way to analyze banking Balance sheets provide a precise way to analyze banking

transactions. The table below shows balance sheets of a transactions. The table below shows balance sheets of a

hypothetical commercial bank and one of its customers. The hypothetical commercial bank and one of its customers. The

deposits of customers are liabilities to the bank because they are deposits of customers are liabilities to the bank because they are

amounts that the bank owes to them. On the other hand, these same amounts that the bank owes to them. On the other hand, these same

deposits are assets for the customers. The loans the bank makes to deposits are assets for the customers. The loans the bank makes to

consumers and businesses are assets to the bank but liabilities to the consumers and businesses are assets to the bank but liabilities to the

consumers and businesses.consumers and businesses.

Balance sheets provide a precise way to analyze banking Balance sheets provide a precise way to analyze banking

transactions. The table below shows balance sheets of a transactions. The table below shows balance sheets of a

hypothetical commercial bank and one of its customers. The hypothetical commercial bank and one of its customers. The

deposits of customers are liabilities to the bank because they are deposits of customers are liabilities to the bank because they are

amounts that the bank owes to them. On the other hand, these same amounts that the bank owes to them. On the other hand, these same

deposits are assets for the customers. The loans the bank makes to deposits are assets for the customers. The loans the bank makes to

consumers and businesses are assets to the bank but liabilities to the consumers and businesses are assets to the bank but liabilities to the

consumers and businesses.consumers and businesses.

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Hypothetical Balance Sheets

Commercial Bank

.

Germaine

Assets .Liabilities and Net

WorthAssets .

Liabilities and Net Worth

Vault Cash$1,000,000

loans$9,000,000

Checking Deposits$4,9000,000

Savings Deposits$4,900,000Net Worth$200,000

Deposits at Bank$400

cash $200car $3000

personal items $2000

Loan from Bank $2000

Net Worth $3600

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Suppose that Germaine, the bank customer, decides to Suppose that Germaine, the bank customer, decides to deposit into a savings account some of the cash she has in her deposit into a savings account some of the cash she has in her piggy bank. The effect on the bank will be to increase its vault piggy bank. The effect on the bank will be to increase its vault cash on its asset side and also to increase its savings deposits on cash on its asset side and also to increase its savings deposits on its liability side. For Germaine, the transaction will not affect the its liability side. For Germaine, the transaction will not affect the liability side of her balance sheet at all. She will reduce her cash liability side of her balance sheet at all. She will reduce her cash holdings and increase the amount she has in her savings account. holdings and increase the amount she has in her savings account. As a result of this portfolio decision that Germaine makes, she As a result of this portfolio decision that Germaine makes, she will earn a higher return on her assets than she did before, but she will earn a higher return on her assets than she did before, but she will have slightly less liquidity. If Germaine deposits $100, we will have slightly less liquidity. If Germaine deposits $100, we could show the effect of her actions by putting in only the could show the effect of her actions by putting in only the changes, which is done below. Notice how balance is preserved changes, which is done below. Notice how balance is preserved on both sheets.on both sheets.

Suppose that Germaine, the bank customer, decides to Suppose that Germaine, the bank customer, decides to deposit into a savings account some of the cash she has in her deposit into a savings account some of the cash she has in her piggy bank. The effect on the bank will be to increase its vault piggy bank. The effect on the bank will be to increase its vault cash on its asset side and also to increase its savings deposits on cash on its asset side and also to increase its savings deposits on its liability side. For Germaine, the transaction will not affect the its liability side. For Germaine, the transaction will not affect the liability side of her balance sheet at all. She will reduce her cash liability side of her balance sheet at all. She will reduce her cash holdings and increase the amount she has in her savings account. holdings and increase the amount she has in her savings account. As a result of this portfolio decision that Germaine makes, she As a result of this portfolio decision that Germaine makes, she will earn a higher return on her assets than she did before, but she will earn a higher return on her assets than she did before, but she will have slightly less liquidity. If Germaine deposits $100, we will have slightly less liquidity. If Germaine deposits $100, we could show the effect of her actions by putting in only the could show the effect of her actions by putting in only the changes, which is done below. Notice how balance is preserved changes, which is done below. Notice how balance is preserved on both sheets.on both sheets.

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Hypothetical Balance Sheets--Changes

Commercial Bank

.

Germaine

Assets .Liabilities and Net

WorthAssets .

Liabilities and Net Worth

Vault Cash+$100loans --

Checking Deposits--

Savings Deposits+$100

Net Worth --

Deposits at Bank+$100

cash -$100car --

personal items --

Loan from Bank --Net Worth --

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2.4 Speculators and Markets

“ “EFFICIENT MARKET”EFFICIENT MARKET”

Suppose that you receive an advertisement in the mail offering Suppose that you receive an advertisement in the mail offering

you a book that tells you how you can beat the stock market and you a book that tells you how you can beat the stock market and

become rich. If this book is offered to you for a mere $50, should become rich. If this book is offered to you for a mere $50, should

you buy it? A little reflection should suggest that you be very, very you buy it? A little reflection should suggest that you be very, very

suspicious. If there was a way to beat the market, the person who suspicious. If there was a way to beat the market, the person who

had the way should keep quiet and use it. Once the method had the way should keep quiet and use it. Once the method

becomes publicly known, its use will eliminate any source of profit.becomes publicly known, its use will eliminate any source of profit.

2.4 Speculators and Markets

“ “EFFICIENT MARKET”EFFICIENT MARKET”

Suppose that you receive an advertisement in the mail offering Suppose that you receive an advertisement in the mail offering

you a book that tells you how you can beat the stock market and you a book that tells you how you can beat the stock market and

become rich. If this book is offered to you for a mere $50, should become rich. If this book is offered to you for a mere $50, should

you buy it? A little reflection should suggest that you be very, very you buy it? A little reflection should suggest that you be very, very

suspicious. If there was a way to beat the market, the person who suspicious. If there was a way to beat the market, the person who

had the way should keep quiet and use it. Once the method had the way should keep quiet and use it. Once the method

becomes publicly known, its use will eliminate any source of profit.becomes publicly known, its use will eliminate any source of profit.

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A financial market is an "efficient market" if its prices take into A financial market is an "efficient market" if its prices take into

account all knowledge that people have about that market. (Notice account all knowledge that people have about that market. (Notice

that the use of the word "efficiency" in this context is not the same that the use of the word "efficiency" in this context is not the same

as the use of the word in most of microeconomics.) If there is as the use of the word in most of microeconomics.) If there is

knowledge that is not being used, unexploited profit opportunities knowledge that is not being used, unexploited profit opportunities

exist, and in financial markets these opportunities should be exist, and in financial markets these opportunities should be

quickly taken. quickly taken.

A financial market is an "efficient market" if its prices take into A financial market is an "efficient market" if its prices take into

account all knowledge that people have about that market. (Notice account all knowledge that people have about that market. (Notice

that the use of the word "efficiency" in this context is not the same that the use of the word "efficiency" in this context is not the same

as the use of the word in most of microeconomics.) If there is as the use of the word in most of microeconomics.) If there is

knowledge that is not being used, unexploited profit opportunities knowledge that is not being used, unexploited profit opportunities

exist, and in financial markets these opportunities should be exist, and in financial markets these opportunities should be

quickly taken. quickly taken.

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If one knows that a stock or bond is undervalued and that it If one knows that a stock or bond is undervalued and that it

will rise in value, one will make a large amount of money by will rise in value, one will make a large amount of money by

buying until it does rise. Because profit opportunities are buying until it does rise. Because profit opportunities are

quickly exploited once they become known, one cannot "beat" quickly exploited once they become known, one cannot "beat"

an efficient market unless one has special information that is an efficient market unless one has special information that is

unavailable to others.unavailable to others.

If one knows that a stock or bond is undervalued and that it If one knows that a stock or bond is undervalued and that it

will rise in value, one will make a large amount of money by will rise in value, one will make a large amount of money by

buying until it does rise. Because profit opportunities are buying until it does rise. Because profit opportunities are

quickly exploited once they become known, one cannot "beat" quickly exploited once they become known, one cannot "beat"

an efficient market unless one has special information that is an efficient market unless one has special information that is

unavailable to others.unavailable to others.

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If the stock market is an efficient market, movements of stock If the stock market is an efficient market, movements of stock

prices from day to day will be random. Knowing the past prices from day to day will be random. Knowing the past

movements of the stock does not help one predict what the future movements of the stock does not help one predict what the future

price will be. This idea contradicts the technique of picking stocks price will be. This idea contradicts the technique of picking stocks

used by "chartists" or "technicians" who believe that past used by "chartists" or "technicians" who believe that past

movements can reveal patterns. movements can reveal patterns.

If the stock market is an efficient market, movements of stock If the stock market is an efficient market, movements of stock

prices from day to day will be random. Knowing the past prices from day to day will be random. Knowing the past

movements of the stock does not help one predict what the future movements of the stock does not help one predict what the future

price will be. This idea contradicts the technique of picking stocks price will be. This idea contradicts the technique of picking stocks

used by "chartists" or "technicians" who believe that past used by "chartists" or "technicians" who believe that past

movements can reveal patterns. movements can reveal patterns.

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A variety of studies that have compared randomly picked A variety of studies that have compared randomly picked

portfolios of stocks with stocks chosen by various portfolios of stocks with stocks chosen by various

technical rules supports the idea that information about technical rules supports the idea that information about

past movements of stock prices does not help predict the past movements of stock prices does not help predict the

future. The idea of efficient markets suggests that one future. The idea of efficient markets suggests that one

should not place a great deal of faith in any forecasts should not place a great deal of faith in any forecasts

about interest rates or stock prices, because if the person about interest rates or stock prices, because if the person

making the forecast really does know what will happen, he making the forecast really does know what will happen, he

could keep quiet and get rich.could keep quiet and get rich.

A variety of studies that have compared randomly picked A variety of studies that have compared randomly picked

portfolios of stocks with stocks chosen by various portfolios of stocks with stocks chosen by various

technical rules supports the idea that information about technical rules supports the idea that information about

past movements of stock prices does not help predict the past movements of stock prices does not help predict the

future. The idea of efficient markets suggests that one future. The idea of efficient markets suggests that one

should not place a great deal of faith in any forecasts should not place a great deal of faith in any forecasts

about interest rates or stock prices, because if the person about interest rates or stock prices, because if the person

making the forecast really does know what will happen, he making the forecast really does know what will happen, he

could keep quiet and get rich.could keep quiet and get rich.

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SPECULATORSSPECULATORS

Speculators play a useful role in an efficient market where Speculators play a useful role in an efficient market where

prices adjust very quickly to new information. They are coolly prices adjust very quickly to new information. They are coolly

rational individuals looking at the fundamental values of items, rational individuals looking at the fundamental values of items,

buying when prices are too low and helping lift these prices, and buying when prices are too low and helping lift these prices, and

selling when prices are too high and helping to lower these prices. selling when prices are too high and helping to lower these prices.

As a result, prices correctly transmit information about values that As a result, prices correctly transmit information about values that

people can then use to make decisions. An efficient market will people can then use to make decisions. An efficient market will

not be the source of economic disturbances. It can, however, not be the source of economic disturbances. It can, however,

transmit disturbances, and this alone would be enough to interest transmit disturbances, and this alone would be enough to interest

economists.economists.

SPECULATORSSPECULATORS

Speculators play a useful role in an efficient market where Speculators play a useful role in an efficient market where

prices adjust very quickly to new information. They are coolly prices adjust very quickly to new information. They are coolly

rational individuals looking at the fundamental values of items, rational individuals looking at the fundamental values of items,

buying when prices are too low and helping lift these prices, and buying when prices are too low and helping lift these prices, and

selling when prices are too high and helping to lower these prices. selling when prices are too high and helping to lower these prices.

As a result, prices correctly transmit information about values that As a result, prices correctly transmit information about values that

people can then use to make decisions. An efficient market will people can then use to make decisions. An efficient market will

not be the source of economic disturbances. It can, however, not be the source of economic disturbances. It can, however,

transmit disturbances, and this alone would be enough to interest transmit disturbances, and this alone would be enough to interest

economists.economists.

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““GREATER-FOOL” THEORYGREATER-FOOL” THEORY

However, there are some who argue that financial markets are However, there are some who argue that financial markets are

not efficient and do not always adjust to economic conditions. Thenot efficient and do not always adjust to economic conditions. The

y argue that those trading in financial markets are not always calmly argue that those trading in financial markets are not always calml

y rational in the way that those who believe in efficient markets picy rational in the way that those who believe in efficient markets pic

ture them. Rather traders can go on speculative binges, ignoring reture them. Rather traders can go on speculative binges, ignoring re

ality. ality.

““GREATER-FOOL” THEORYGREATER-FOOL” THEORY

However, there are some who argue that financial markets are However, there are some who argue that financial markets are

not efficient and do not always adjust to economic conditions. Thenot efficient and do not always adjust to economic conditions. The

y argue that those trading in financial markets are not always calmly argue that those trading in financial markets are not always calml

y rational in the way that those who believe in efficient markets picy rational in the way that those who believe in efficient markets pic

ture them. Rather traders can go on speculative binges, ignoring reture them. Rather traders can go on speculative binges, ignoring re

ality. ality.

Text :Text :

An important reason people buy items in financial markets is in An important reason people buy items in financial markets is in

the hope of selling them at a profit. Thus trading in these the hope of selling them at a profit. Thus trading in these

markets involves not only an analysis of the fundamental value markets involves not only an analysis of the fundamental value

of an asset, but also an analysis of how other people will react. of an asset, but also an analysis of how other people will react.

If people are confident that others will buy the item for more If people are confident that others will buy the item for more

than they paid for it, then they will buy it even if it has little than they paid for it, then they will buy it even if it has little

value to them.value to them.

An important reason people buy items in financial markets is in An important reason people buy items in financial markets is in

the hope of selling them at a profit. Thus trading in these the hope of selling them at a profit. Thus trading in these

markets involves not only an analysis of the fundamental value markets involves not only an analysis of the fundamental value

of an asset, but also an analysis of how other people will react. of an asset, but also an analysis of how other people will react.

If people are confident that others will buy the item for more If people are confident that others will buy the item for more

than they paid for it, then they will buy it even if it has little than they paid for it, then they will buy it even if it has little

value to them.value to them.

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The idea described above has been called the "greater-fool" The idea described above has been called the "greater-fool"

theory. It implies that although one may be a fool for buying an theory. It implies that although one may be a fool for buying an

asset that is overpriced, one can profit if there are still greater fools asset that is overpriced, one can profit if there are still greater fools

who will pay even more for it. The idea is an example of the model who will pay even more for it. The idea is an example of the model

of contingent behavior. In contingent behavior, people's actions are of contingent behavior. In contingent behavior, people's actions are

based on the way they expect others to act. To the extent that based on the way they expect others to act. To the extent that

people act in this way and that "greater-fool" speculating people act in this way and that "greater-fool" speculating

influences prices in financial markets, financial markets can serve influences prices in financial markets, financial markets can serve

as a source of economic disturbances rather than as mere as a source of economic disturbances rather than as mere

transmitters.transmitters.

The idea described above has been called the "greater-fool" The idea described above has been called the "greater-fool"

theory. It implies that although one may be a fool for buying an theory. It implies that although one may be a fool for buying an

asset that is overpriced, one can profit if there are still greater fools asset that is overpriced, one can profit if there are still greater fools

who will pay even more for it. The idea is an example of the model who will pay even more for it. The idea is an example of the model

of contingent behavior. In contingent behavior, people's actions are of contingent behavior. In contingent behavior, people's actions are

based on the way they expect others to act. To the extent that based on the way they expect others to act. To the extent that

people act in this way and that "greater-fool" speculating people act in this way and that "greater-fool" speculating

influences prices in financial markets, financial markets can serve influences prices in financial markets, financial markets can serve

as a source of economic disturbances rather than as mere as a source of economic disturbances rather than as mere

transmitters.transmitters.

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EXAMPLE OF SPECULATIVE BINGESEXAMPLE OF SPECULATIVE BINGES

There are many cases in which markets clearly were on There are many cases in which markets clearly were on

speculative binges. One of the earliest and most famous was speculative binges. One of the earliest and most famous was

the Dutch tulip market of the 1630s. The tulip was introduced the Dutch tulip market of the 1630s. The tulip was introduced

into Holland in the middle of the 16th century from into Holland in the middle of the 16th century from

Constantinople. It immediately became a status symbol among Constantinople. It immediately became a status symbol among

the very rich, and then as it became a bit less rare, among the the very rich, and then as it became a bit less rare, among the

middle classes.middle classes.

EXAMPLE OF SPECULATIVE BINGESEXAMPLE OF SPECULATIVE BINGES

There are many cases in which markets clearly were on There are many cases in which markets clearly were on

speculative binges. One of the earliest and most famous was speculative binges. One of the earliest and most famous was

the Dutch tulip market of the 1630s. The tulip was introduced the Dutch tulip market of the 1630s. The tulip was introduced

into Holland in the middle of the 16th century from into Holland in the middle of the 16th century from

Constantinople. It immediately became a status symbol among Constantinople. It immediately became a status symbol among

the very rich, and then as it became a bit less rare, among the the very rich, and then as it became a bit less rare, among the

middle classes.middle classes.

Text :Text :

After 1630 the price of tulips reflected not only their After 1630 the price of tulips reflected not only their

stylishness, but also speculation. People began to gamble on price stylishness, but also speculation. People began to gamble on price

changes. As people began to join the speculation, trying to get in changes. As people began to join the speculation, trying to get in

at low prices, prices took off and the market developed a life of its at low prices, prices took off and the market developed a life of its

own. People bought tulips at ridiculous prices only because they own. People bought tulips at ridiculous prices only because they

thought other people would be willing to pay equally ridiculous thought other people would be willing to pay equally ridiculous

prices. For example, a single bulb was exchanged for twelve acres prices. For example, a single bulb was exchanged for twelve acres

of land. Another was sold for a carriage, two horses, and a of land. Another was sold for a carriage, two horses, and a

substantial sum of cash.substantial sum of cash.

After 1630 the price of tulips reflected not only their After 1630 the price of tulips reflected not only their

stylishness, but also speculation. People began to gamble on price stylishness, but also speculation. People began to gamble on price

changes. As people began to join the speculation, trying to get in changes. As people began to join the speculation, trying to get in

at low prices, prices took off and the market developed a life of its at low prices, prices took off and the market developed a life of its

own. People bought tulips at ridiculous prices only because they own. People bought tulips at ridiculous prices only because they

thought other people would be willing to pay equally ridiculous thought other people would be willing to pay equally ridiculous

prices. For example, a single bulb was exchanged for twelve acres prices. For example, a single bulb was exchanged for twelve acres

of land. Another was sold for a carriage, two horses, and a of land. Another was sold for a carriage, two horses, and a

substantial sum of cash.substantial sum of cash.

Text :Text :

The "bulls“—those who expected rising prices—ruled the The "bulls“—those who expected rising prices—ruled the bulb market until 1636. The boom faded when enough Dutchmen bulb market until 1636. The boom faded when enough Dutchmen began to wonder if tulip bulbs were really worth what they were began to wonder if tulip bulbs were really worth what they were being traded for, and decided to get out of the market while they being traded for, and decided to get out of the market while they were ahead. As this sentiment spread, the market peaked and were ahead. As this sentiment spread, the market peaked and began to fall. Speculative markets can crash almost instantly began to fall. Speculative markets can crash almost instantly because once prices begin to fall, people realize that there is no because once prices begin to fall, people realize that there is no fundamental reason for them to be so high. The prices of tulip fundamental reason for them to be so high. The prices of tulip bulbs fell until they reached a realistic value, which meant that a bulbs fell until they reached a realistic value, which meant that a single bulb was almost worthless. Looking back at tulipmania, single bulb was almost worthless. Looking back at tulipmania, we have a tendency to think, "That is a funny episode, but of no we have a tendency to think, "That is a funny episode, but of no importance. People are smarter today."importance. People are smarter today."

The "bulls“—those who expected rising prices—ruled the The "bulls“—those who expected rising prices—ruled the bulb market until 1636. The boom faded when enough Dutchmen bulb market until 1636. The boom faded when enough Dutchmen began to wonder if tulip bulbs were really worth what they were began to wonder if tulip bulbs were really worth what they were being traded for, and decided to get out of the market while they being traded for, and decided to get out of the market while they were ahead. As this sentiment spread, the market peaked and were ahead. As this sentiment spread, the market peaked and began to fall. Speculative markets can crash almost instantly began to fall. Speculative markets can crash almost instantly because once prices begin to fall, people realize that there is no because once prices begin to fall, people realize that there is no fundamental reason for them to be so high. The prices of tulip fundamental reason for them to be so high. The prices of tulip bulbs fell until they reached a realistic value, which meant that a bulbs fell until they reached a realistic value, which meant that a single bulb was almost worthless. Looking back at tulipmania, single bulb was almost worthless. Looking back at tulipmania, we have a tendency to think, "That is a funny episode, but of no we have a tendency to think, "That is a funny episode, but of no importance. People are smarter today."importance. People are smarter today."

Text :Text :

Markets based on "greater-fool" psychology always collapse. Markets based on "greater-fool" psychology always collapse.

Eventually the greatest fool is found, and once he is found, the Eventually the greatest fool is found, and once he is found, the

process cannot continue. In many ways a speculative binge is like a process cannot continue. In many ways a speculative binge is like a

chain letter. Everyone involved in a chain letter believes that he or chain letter. Everyone involved in a chain letter believes that he or

she will get rich. But since all that is involved is a reshuffling of she will get rich. But since all that is involved is a reshuffling of

money, if someone does get rich, others must get poorer. Like money, if someone does get rich, others must get poorer. Like

speculative binges, chain letters die when the greatest fools have speculative binges, chain letters die when the greatest fools have

found and joined the chain.found and joined the chain.

Markets based on "greater-fool" psychology always collapse. Markets based on "greater-fool" psychology always collapse.

Eventually the greatest fool is found, and once he is found, the Eventually the greatest fool is found, and once he is found, the

process cannot continue. In many ways a speculative binge is like a process cannot continue. In many ways a speculative binge is like a

chain letter. Everyone involved in a chain letter believes that he or chain letter. Everyone involved in a chain letter believes that he or

she will get rich. But since all that is involved is a reshuffling of she will get rich. But since all that is involved is a reshuffling of

money, if someone does get rich, others must get poorer. Like money, if someone does get rich, others must get poorer. Like

speculative binges, chain letters die when the greatest fools have speculative binges, chain letters die when the greatest fools have

found and joined the chain.found and joined the chain.

Text :Text :

Speculative binges can affect the production of an economy Speculative binges can affect the production of an economy

if they cause enough financial disruption. They will cause if they cause enough financial disruption. They will cause

bankruptcies, reduce people's trust in others, and cause bankruptcies, reduce people's trust in others, and cause

unemployment for the people who became speculators. However, unemployment for the people who became speculators. However,

few periods of inflation or recession can be linked to speculative few periods of inflation or recession can be linked to speculative

binges, and, as a result, most economists do not believe that they, binges, and, as a result, most economists do not believe that they,

or the financial markets, are an important source of or the financial markets, are an important source of

macroeconomic disturbance.macroeconomic disturbance.

Speculative binges can affect the production of an economy Speculative binges can affect the production of an economy

if they cause enough financial disruption. They will cause if they cause enough financial disruption. They will cause

bankruptcies, reduce people's trust in others, and cause bankruptcies, reduce people's trust in others, and cause

unemployment for the people who became speculators. However, unemployment for the people who became speculators. However,

few periods of inflation or recession can be linked to speculative few periods of inflation or recession can be linked to speculative

binges, and, as a result, most economists do not believe that they, binges, and, as a result, most economists do not believe that they,

or the financial markets, are an important source of or the financial markets, are an important source of

macroeconomic disturbance.macroeconomic disturbance.

Text :Text :

Some people argue that the Great Depression was a result of a Some people argue that the Great Depression was a result of a

speculative binge in the stock market in 1928 and 1929. Most speculative binge in the stock market in 1928 and 1929. Most

economists dismiss this theory because prices in the stock market economists dismiss this theory because prices in the stock market

did not reach levels that were clearly outlandish. Some market did not reach levels that were clearly outlandish. Some market

watchers have even argued that stock prices were not overvalued watchers have even argued that stock prices were not overvalued

at all in 1929 if the 1930s would have been a normal decade.at all in 1929 if the 1930s would have been a normal decade.

Some people argue that the Great Depression was a result of a Some people argue that the Great Depression was a result of a

speculative binge in the stock market in 1928 and 1929. Most speculative binge in the stock market in 1928 and 1929. Most

economists dismiss this theory because prices in the stock market economists dismiss this theory because prices in the stock market

did not reach levels that were clearly outlandish. Some market did not reach levels that were clearly outlandish. Some market

watchers have even argued that stock prices were not overvalued watchers have even argued that stock prices were not overvalued

at all in 1929 if the 1930s would have been a normal decade.at all in 1929 if the 1930s would have been a normal decade.

Text :Text :

Even if one believes that stocks were overvalued in 1929, and Even if one believes that stocks were overvalued in 1929, and

that the stock market had gone on a speculative binge, it is hard, that the stock market had gone on a speculative binge, it is hard,

and perhaps impossible, to explain why the results of this and perhaps impossible, to explain why the results of this

particular binge were so much more severe than the aftereffects of particular binge were so much more severe than the aftereffects of

other, equally large binges in the stock market. In particular, the other, equally large binges in the stock market. In particular, the

very large drop in stock market prices on Monday, October 19, very large drop in stock market prices on Monday, October 19,

1987 left few traces on production or consumption during the 1987 left few traces on production or consumption during the

following year. Yet on that one day the value of common stocks, following year. Yet on that one day the value of common stocks,

as measured by the Dow Jones Industrial Index, dropped by more as measured by the Dow Jones Industrial Index, dropped by more

than 22%. Clearly a speculative crash in financial markets is not than 22%. Clearly a speculative crash in financial markets is not

enough, by itself, to trigger a recession.enough, by itself, to trigger a recession.

Even if one believes that stocks were overvalued in 1929, and Even if one believes that stocks were overvalued in 1929, and

that the stock market had gone on a speculative binge, it is hard, that the stock market had gone on a speculative binge, it is hard,

and perhaps impossible, to explain why the results of this and perhaps impossible, to explain why the results of this

particular binge were so much more severe than the aftereffects of particular binge were so much more severe than the aftereffects of

other, equally large binges in the stock market. In particular, the other, equally large binges in the stock market. In particular, the

very large drop in stock market prices on Monday, October 19, very large drop in stock market prices on Monday, October 19,

1987 left few traces on production or consumption during the 1987 left few traces on production or consumption during the

following year. Yet on that one day the value of common stocks, following year. Yet on that one day the value of common stocks,

as measured by the Dow Jones Industrial Index, dropped by more as measured by the Dow Jones Industrial Index, dropped by more

than 22%. Clearly a speculative crash in financial markets is not than 22%. Clearly a speculative crash in financial markets is not

enough, by itself, to trigger a recession.enough, by itself, to trigger a recession.

Text : Language PointsText : Language Points

intermediaryintermediary n. acting as a mediator or an agent between persons n. acting as a mediator or an agent between persons

or things. or things. 中间人中间人 ; ; 媒介媒介 (( 物物 ))

eg. Conducts of eg. Conducts of intermediaryintermediary institutions are being standardized to institutions are being standardized to

better serve foreign invested enterprises. better serve foreign invested enterprises.

规范中介机构的行为，引导中介机构更好地为外商投资企规范中介机构的行为，引导中介机构更好地为外商投资企

业服务。业服务。

financial intermediaryfinancial intermediary 金融中介机构金融中介机构

intermediaryintermediary n. acting as a mediator or an agent between persons n. acting as a mediator or an agent between persons

or things. or things. 中间人中间人 ; ; 媒介媒介 (( 物物 ))

eg. Conducts of eg. Conducts of intermediaryintermediary institutions are being standardized to institutions are being standardized to

better serve foreign invested enterprises. better serve foreign invested enterprises.

规范中介机构的行为，引导中介机构更好地为外商投资企规范中介机构的行为，引导中介机构更好地为外商投资企

业服务。业服务。

financial intermediaryfinancial intermediary 金融中介机构金融中介机构


middlemanmiddleman n. a trader who buys from producers and sells to retailen. a trader who buys from producers and sells to retaile

rs or consumers.rs or consumers. 经纪人；掮客经纪人；掮客

eg. The investment bank is the eg. The investment bank is the middlemanmiddleman between company and between company and

investor. investor.

投资银行是公司和投资者的中间商。投资银行是公司和投资者的中间商。

middlemanmiddleman n. a trader who buys from producers and sells to retailen. a trader who buys from producers and sells to retaile

rs or consumers.rs or consumers. 经纪人；掮客经纪人；掮客

eg. The investment bank is the eg. The investment bank is the middlemanmiddleman between company and between company and

investor. investor.

投资银行是公司和投资者的中间商。投资银行是公司和投资者的中间商。


macroeconomicmacroeconomic n. 宏观经济 eg. The microeconomic and macroeconomic fluctuations might eff

ect the loan.

微观和宏观经济的波动也许会影响贷款的归还。微观和宏观经济的波动也许会影响贷款的归还。

macroeconomicmacroeconomic n. 宏观经济 eg. The microeconomic and macroeconomic fluctuations might eff

ect the loan.

微观和宏观经济的波动也许会影响贷款的归还。微观和宏观经济的波动也许会影响贷款的归还。


mutual fundmutual fund an investment company that continually offers new san investment company that continually offers new s

hares and buys existing shares back on demand and uses its capital thares and buys existing shares back on demand and uses its capital t

o invest in diversified securities of other companieso invest in diversified securities of other companies 共有基金共有基金 (( 一一

种投资公司形式种投资公司形式 ))

eg. The study conducted by Oppenheimer, aeg. The study conducted by Oppenheimer, a mutual fundmutual fund compan compan

y, reveals that many young women are suffering from the Carrie Bry, reveals that many young women are suffering from the Carrie Br

adshaw syndrome. adshaw syndrome.

这项由一家叫做这项由一家叫做 OppenheimerOppenheimer 的共同基金公司所做的调的共同基金公司所做的调

查发现，不少青年妇女患上了查发现，不少青年妇女患上了 Carrie BradshawCarrie Bradshaw 综合症。综合症。

mutual fundmutual fund an investment company that continually offers new san investment company that continually offers new s

hares and buys existing shares back on demand and uses its capital thares and buys existing shares back on demand and uses its capital t

o invest in diversified securities of other companieso invest in diversified securities of other companies 共有基金共有基金 (( 一一

种投资公司形式种投资公司形式 ))

eg. The study conducted by Oppenheimer, aeg. The study conducted by Oppenheimer, a mutual fundmutual fund compan compan

y, reveals that many young women are suffering from the Carrie Bry, reveals that many young women are suffering from the Carrie Br

adshaw syndrome. adshaw syndrome.

这项由一家叫做这项由一家叫做 OppenheimerOppenheimer 的共同基金公司所做的调的共同基金公司所做的调

查发现，不少青年妇女患上了查发现，不少青年妇女患上了 Carrie BradshawCarrie Bradshaw 综合症。综合症。


diversitydiversity n. a point or respect in which things differ. . a point or respect in which things differ. 差异差异 , , 多样多样

性性

eg. A eg. A diversitydiversity leads to prosperity. leads to prosperity.

穷则变，变则通。穷则变，变则通。

offsetoffset n. an agent, an element, or a thing that balances, counteracts,n. an agent, an element, or a thing that balances, counteracts,

or compensates for something else. or compensates for something else. 抵消抵消 ; ; 补偿补偿

eg. The gains eg. The gains offsetoffset the losses. the losses.

损益相抵。损益相抵。

This will This will offsetoffset the loss. the loss.

这将弥补损失。这将弥补损失。

diversitydiversity n. a point or respect in which things differ. . a point or respect in which things differ. 差异差异 , , 多样多样

性性

eg. A eg. A diversitydiversity leads to prosperity. leads to prosperity.

穷则变，变则通。穷则变，变则通。

offsetoffset n. an agent, an element, or a thing that balances, counteracts,n. an agent, an element, or a thing that balances, counteracts,

or compensates for something else. or compensates for something else. 抵消抵消 ; ; 补偿补偿

eg. The gains eg. The gains offsetoffset the losses. the losses.

损益相抵。损益相抵。

This will This will offsetoffset the loss. the loss.

这将弥补损失。这将弥补损失。


bad loanbad loan 呆帐呆帐 , , 过期未还的贷款过期未还的贷款

convertconvert v. to exchange (a security, for example) by substitu v. to exchange (a security, for example) by substitu

ting an equivalent of another form. ting an equivalent of another form. 更换：将（如一种证券）兑更换：将（如一种证券）兑

换成另一形式的等价物换成另一形式的等价物

eg. The company eg. The company convertedconverted its assets into cash. its assets into cash.

公司将资产转化成现金。公司将资产转化成现金。

bad loanbad loan 呆帐呆帐 , , 过期未还的贷款过期未还的贷款

convertconvert v. to exchange (a security, for example) by substitu v. to exchange (a security, for example) by substitu

ting an equivalent of another form. ting an equivalent of another form. 更换：将（如一种证券）兑更换：将（如一种证券）兑

换成另一形式的等价物换成另一形式的等价物

eg. The company eg. The company convertedconverted its assets into cash. its assets into cash.

公司将资产转化成现金。公司将资产转化成现金。


assetsassets n. n. 资产，财产资产，财产

eg. financial eg. financial assetsassets management companies management companies

金融资产管理公司金融资产管理公司

fixed fixed assetsassets investment administration investment administration

固定资产投资管理固定资产投资管理

idleidle a. not in use or operation a. not in use or operation 闲置的闲置的

eg. The tongue of eg. The tongue of idleidle persons is never persons is never idleidle. .

[[ 谚谚 ]] 人懒嘴不懒。人懒嘴不懒。

federal-funds marketfederal-funds market 联邦基金市场联邦基金市场

assetsassets n. n. 资产，财产资产，财产

eg. financial eg. financial assetsassets management companies management companies

金融资产管理公司金融资产管理公司

fixed fixed assetsassets investment administration investment administration

固定资产投资管理固定资产投资管理

idleidle a. not in use or operation a. not in use or operation 闲置的闲置的

eg. The tongue of eg. The tongue of idleidle persons is never persons is never idleidle. .

[[ 谚谚 ]] 人懒嘴不懒。人懒嘴不懒。

federal-funds marketfederal-funds market 联邦基金市场联邦基金市场


tradeofftradeoff n. an exchange of one thing in return for another, especialn. an exchange of one thing in return for another, especial

ly relinquishment of one benefit or advantage for another regarded ly relinquishment of one benefit or advantage for another regarded

as more desirableas more desirable 交易，交换：以一物换取另一物，尤指放弃交易，交换：以一物换取另一物，尤指放弃

一种利益或优势以换取另一种被认为更有价值的物品一种利益或优势以换取另一种被认为更有价值的物品

eg. This is a simple cost/benefit eg. This is a simple cost/benefit tradeofftradeoff. .

这是一个简单的成本／收益权衡。这是一个简单的成本／收益权衡。

tradeofftradeoff n. an exchange of one thing in return for another, especialn. an exchange of one thing in return for another, especial

ly relinquishment of one benefit or advantage for another regarded ly relinquishment of one benefit or advantage for another regarded

as more desirableas more desirable 交易，交换：以一物换取另一物，尤指放弃交易，交换：以一物换取另一物，尤指放弃

一种利益或优势以换取另一种被认为更有价值的物品一种利益或优势以换取另一种被认为更有价值的物品

eg. This is a simple cost/benefit eg. This is a simple cost/benefit tradeofftradeoff. .

这是一个简单的成本／收益权衡。这是一个简单的成本／收益权衡。


balance sheet (BS)balance sheet (BS) a statement of a business or an institution thaa statement of a business or an institution tha

t lists the assets, debts, and owners ’ investment as of a specified dat lists the assets, debts, and owners ’ investment as of a specified da

te.te. 资产负债表：一个公司或机构在指定日期的资产、负债和所资产负债表：一个公司或机构在指定日期的资产、负债和所

有者投资的列表说明有者投资的列表说明

balance sheet (BS)balance sheet (BS) a statement of a business or an institution thaa statement of a business or an institution tha

t lists the assets, debts, and owners ’ investment as of a specified dat lists the assets, debts, and owners ’ investment as of a specified da

te.te. 资产负债表：一个公司或机构在指定日期的资产、负债和所资产负债表：一个公司或机构在指定日期的资产、负债和所

有者投资的列表说明有者投资的列表说明


liabilityliability n. anything that is a hindrance or puts an individual at a

disadvantage. 负债，债务：某一企业的资产收支表上的财政债务

eg. A partnership may have unlimited liability as well as limited

liability.

合营可以是无限责任也可以是有限责任。

liabilityliability n. anything that is a hindrance or puts an individual at a

disadvantage. 负债，债务：某一企业的资产收支表上的财政债务

eg. A partnership may have unlimited liability as well as limited

liability.

合营可以是无限责任也可以是有限责任。


speculatorspeculator n. one that speculatesn. one that speculates 投机者投机者

eg. He is a eg. He is a speculatorspeculator who hold up customers. who hold up customers.

他是个向顾客索取高价的投机商人。他是个向顾客索取高价的投机商人。

exploitexploit v. to employ to the greatest possible advantage v. to employ to the greatest possible advantage 开发开发

eg. We shall eg. We shall exploitexploit our rich resource to expand the economy. our rich resource to expand the economy.

我们应该利用我们丰富的资源发展经济。我们应该利用我们丰富的资源发展经济。

speculatorspeculator n. one that speculatesn. one that speculates 投机者投机者

eg. He is a eg. He is a speculatorspeculator who hold up customers. who hold up customers.

他是个向顾客索取高价的投机商人。他是个向顾客索取高价的投机商人。

exploitexploit v. to employ to the greatest possible advantage v. to employ to the greatest possible advantage 开发开发

eg. We shall eg. We shall exploitexploit our rich resource to expand the economy. our rich resource to expand the economy.

我们应该利用我们丰富的资源发展经济。我们应该利用我们丰富的资源发展经济。


bingebinge n. a period of excessive or uncontrolled indulgence无节制期

eg. Binge drinking, ready meals and a lack of exercise all take t

heir toll.

酗酒、吃方便食品、缺乏锻炼均对年轻人的健康造成了不良影响。

bingebinge n. a period of excessive or uncontrolled indulgence无节制期

eg. Binge drinking, ready meals and a lack of exercise all take t

heir toll.

酗酒、吃方便食品、缺乏锻炼均对年轻人的健康造成了不良影响。


contingentcontingent a. dependent on conditions or occurrences not yet established; conditional因事而定的：取决于尚未确定的条件或事件的；依条件而定的

eg. Such risks are contingent to the trade .

这种风险在经商中是可能发生的。

contingentcontingent a. dependent on conditions or occurrences not yet established; conditional因事而定的：取决于尚未确定的条件或事件的；依条件而定的

eg. Such risks are contingent to the trade .

这种风险在经商中是可能发生的。

ExercisesExercises

Paraphrase the following expressions or abbreviations and translate Paraphrase the following expressions or abbreviations and translate them into Chinesethem into Chinese

1. intermediary1. intermediary 6. diversity6. diversity

2. offset2. offset 7. tradeoff7. tradeoff

3. liability3. liability 8. speculator8. speculator

4. exploit4. exploit 9. binge9. binge

5. postdate5. postdate 10. BS10. BS

1. intermediary1. intermediary 6. diversity6. diversity

2. offset2. offset 7. tradeoff7. tradeoff

3. liability3. liability 8. speculator8. speculator

4. exploit4. exploit 9. binge9. binge

5. postdate5. postdate 10. BS10. BS

Check-upCheck-up Check-upCheck-up

1.1. intermediary: acting as a mediator or an agent between perintermediary: acting as a mediator or an agent between persons or things. sons or things. 中间人中间人 ; ; 媒介媒介 (( 物物 ))

2.2. offset: an agent, an element, or a thing that balances, counteoffset: an agent, an element, or a thing that balances, counteracts, or compensates for something else. racts, or compensates for something else. 抵消抵消 ; ; 补偿补偿

3.3. liability: liabilities The financial obligations entered in the bliability: liabilities The financial obligations entered in the balance sheet of a business enterprise. alance sheet of a business enterprise. 负债，债务：某一企负债，债务：某一企业的资产收支表上的财政债务业的资产收支表上的财政债务

4.4. exploit: to employ to the greatest possible advantageexploit: to employ to the greatest possible advantage 开发开发

5.5. postdate: to put a date on (a check, for example) that is latepostdate: to put a date on (a check, for example) that is later than the actual date. r than the actual date. 填迟日期填迟日期 ,, 接在接在 ...... 后面后面

Exercises-KeysExercises-Keys

Exercises-KeysExercises-Keys

6. diversity: a point or respect in which things differ 差异 , 多样性7. tradeoff: an exchange of one thing in return for another, especially relinquishment of one benefit or advantage for another regarded as more desirable 交易，交换：以一物换取另一物，尤指放弃一种利益或优势以换取另一种被认为更有价值的物品8. speculator: one that speculates 投机者9. binge: a period of excessive or uncontrolled indulgence无节制期10. BS:= balance sheet , a statement of a business or an institution that lists the assets, debts, and owners' investment as of a specified date. 资产负债表：一个公司或机构在指定日期的资产、负债和所有者投资的列表说明

6. diversity: a point or respect in which things differ 差异 , 多样性7. tradeoff: an exchange of one thing in return for another, especially relinquishment of one benefit or advantage for another regarded as more desirable 交易，交换：以一物换取另一物，尤指放弃一种利益或优势以换取另一种被认为更有价值的物品8. speculator: one that speculates 投机者9. binge: a period of excessive or uncontrolled indulgence无节制期10. BS:= balance sheet , a statement of a business or an institution that lists the assets, debts, and owners' investment as of a specified date. 资产负债表：一个公司或机构在指定日期的资产、负债和所有者投资的列表说明

ExercisesExercises

Fill in the blanks with the proper wordsFill in the blanks with the proper words

investment classes scales investment classes scales merged capablemerged capable

markets single difference markets single difference specialization capitalspecialization capital

ExercisesExercises

In the not so distant past, there was little ________ between In the not so distant past, there was little ________ between

financial and strategic investors. Investors of all colors sought tfinancial and strategic investors. Investors of all colors sought t

o safeguard their ________ by taking over as many managemeno safeguard their ________ by taking over as many managemen

t functions as they could. Additionally, investments were small t functions as they could. Additionally, investments were small

and shareholders few. A firm resembled a household and the nuand shareholders few. A firm resembled a household and the nu

mber of people involved – in ownership and in management – wmber of people involved – in ownership and in management – w

as correspondingly limited. People invested in industries they was correspondingly limited. People invested in industries they w

ere acquainted with first hand.ere acquainted with first hand.

In the not so distant past, there was little ________ between In the not so distant past, there was little ________ between

financial and strategic investors. Investors of all colors sought tfinancial and strategic investors. Investors of all colors sought t

o safeguard their ________ by taking over as many managemeno safeguard their ________ by taking over as many managemen

t functions as they could. Additionally, investments were small t functions as they could. Additionally, investments were small

and shareholders few. A firm resembled a household and the nuand shareholders few. A firm resembled a household and the nu

mber of people involved – in ownership and in management – wmber of people involved – in ownership and in management – w

as correspondingly limited. People invested in industries they was correspondingly limited. People invested in industries they w

ere acquainted with first hand.ere acquainted with first hand.

Check-upCheck-up

ExercisesExercises

As ________ grew, the ________ of industrial production (and As ________ grew, the ________ of industrial production (and

of service provision) expanded. A ________investor (or a small of service provision) expanded. A ________investor (or a small

group of investors) could no longer accommodate the needs group of investors) could no longer accommodate the needs

even of a single firm. As knowledge increased and ________ even of a single firm. As knowledge increased and ________

ensued – it was no longer feasible or possible to micro-manage a ensued – it was no longer feasible or possible to micro-manage a

firm one invested in. firm one invested in.

As ________ grew, the ________ of industrial production (and As ________ grew, the ________ of industrial production (and

of service provision) expanded. A ________investor (or a small of service provision) expanded. A ________investor (or a small


even of a single firm. As knowledge increased and ________ even of a single firm. As knowledge increased and ________

ensued – it was no longer feasible or possible to micro-manage a ensued – it was no longer feasible or possible to micro-manage a

firm one invested in. firm one invested in.

Check-upCheck-up

ExercisesExercises

Actually, separate businesses of money making and business Actually, separate businesses of money making and business

management ________. An investor was expected to excel in management ________. An investor was expected to excel in

obtaining high yields on his ________ – not in industrial obtaining high yields on his ________ – not in industrial

management or in marketing. A manager was expected to management or in marketing. A manager was expected to

manage, not to be ________ of personally tackling the various manage, not to be ________ of personally tackling the various

and varying tasks of the business that he managed. and varying tasks of the business that he managed.


management ________. An investor was expected to excel in management ________. An investor was expected to excel in

obtaining high yields on his ________ – not in industrial obtaining high yields on his ________ – not in industrial


manage, not to be ________ of personally tackling the various manage, not to be ________ of personally tackling the various


Check-upCheck-up

ExercisesExercises

Thus, two ________ of investors emerged. One type supplied Thus, two ________ of investors emerged. One type supplied

firms with capital. The other type supplied them with know-firms with capital. The other type supplied them with know-

how, technology, management skills, marketing techniques, how, technology, management skills, marketing techniques,

intellectual property, clientele and a vision, a sense of direction.intellectual property, clientele and a vision, a sense of direction.

Thus, two ________ of investors emerged. One type supplied Thus, two ________ of investors emerged. One type supplied



intellectual property, clientele and a vision, a sense of direction.intellectual property, clientele and a vision, a sense of direction.

Check-upCheck-up

ExercisesExercises

In the not so distant past, there was little In the not so distant past, there was little differencedifference between between

financial and strategic investors. Investors of all colors sought to financial and strategic investors. Investors of all colors sought to

safeguard their safeguard their investmentinvestment by taking over as many management by taking over as many management

functions as they could. Additionally, investments were small anfunctions as they could. Additionally, investments were small an

d shareholders few. A firm resembled a household and the numbd shareholders few. A firm resembled a household and the numb

er of people involved – in ownership and in management – was er of people involved – in ownership and in management – was

correspondingly limited. People invested in industries they were correspondingly limited. People invested in industries they were

acquainted with first hand.acquainted with first hand.

In the not so distant past, there was little In the not so distant past, there was little differencedifference between between

financial and strategic investors. Investors of all colors sought to financial and strategic investors. Investors of all colors sought to

safeguard their safeguard their investmentinvestment by taking over as many management by taking over as many management

functions as they could. Additionally, investments were small anfunctions as they could. Additionally, investments were small an

d shareholders few. A firm resembled a household and the numbd shareholders few. A firm resembled a household and the numb

er of people involved – in ownership and in management – was er of people involved – in ownership and in management – was

correspondingly limited. People invested in industries they were correspondingly limited. People invested in industries they were

acquainted with first hand.acquainted with first hand.

ExercisesExercises

As As marketsmarkets grew, the grew, the scalesscales of industrial production (and of of industrial production (and of

service provision) expanded. A service provision) expanded. A singlesingle investor (or a small investor (or a small


even of a single firm. As knowledge increased and even of a single firm. As knowledge increased and

specializationspecialization ensued – it was no longer feasible or possible ensued – it was no longer feasible or possible

to micro-manage a firm one invested in. to micro-manage a firm one invested in.

As As marketsmarkets grew, the grew, the scalesscales of industrial production (and of of industrial production (and of

service provision) expanded. A service provision) expanded. A singlesingle investor (or a small investor (or a small


even of a single firm. As knowledge increased and even of a single firm. As knowledge increased and

specializationspecialization ensued – it was no longer feasible or possible ensued – it was no longer feasible or possible

to micro-manage a firm one invested in. to micro-manage a firm one invested in.

ExercisesExercises


management management emergedemerged. An investor was expected to excel in . An investor was expected to excel in

obtaining high yields on his obtaining high yields on his capitalcapital – not in industrial – not in industrial


manage, not to be manage, not to be capablecapable of personally tackling the various of personally tackling the various



management management emergedemerged. An investor was expected to excel in . An investor was expected to excel in

obtaining high yields on his obtaining high yields on his capitalcapital – not in industrial – not in industrial


manage, not to be manage, not to be capablecapable of personally tackling the various of personally tackling the various


ExercisesExercises

Thus, two Thus, two classesclasses of investors emerged. One type supplied of investors emerged. One type supplied



intellectual property, clientele and a vision, a sense of intellectual property, clientele and a vision, a sense of

direction.direction.

Thus, two Thus, two classesclasses of investors emerged. One type supplied of investors emerged. One type supplied



intellectual property, clientele and a vision, a sense of intellectual property, clientele and a vision, a sense of

direction.direction.

ExercisesExercises

Topic for discussionTopic for discussion

What is the function of What is the function of financial intermediaries in the financial intermediaries in the

financial market?financial market?

What is the function of What is the function of financial intermediaries in the financial intermediaries in the

financial market?financial market?

AssignmentsAssignments

1.1. Review the Text .Review the Text .

2.2. Keep in mind the special teKeep in mind the special te

rms learned in this Unit.rms learned in this Unit.

3.3. Do exercises in the book.Do exercises in the book.

Unit 2: FinancialInvestment Financial English Unit 2: Revision of Unit 1Revision of Unit 1Revision of Unit 1Revision of Unit 1 Overview of Unit 2Overview.

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