Introduction

Investments

Lorenzo Naranjo

Spring 2026

About Me

• Education
  • BS and MS in Engineering from PUC Chile
  • PhD in Finance from NYU Stern
• Research Interests
  • Asset Pricing, Commodities, Corporate Restructuring, Derivatives, Fixed-Income
• At WashU
  • I teach derivatives, investments and quantitative finance courses.
  • I am the Academic Director of the MS in Quantitative Finance and MS in FinTech
• Before joining WashU, I taught at ESSEC Business School in Paris and University of Miami.

Teaching

• Undergraduate
  • Financial Technology: Methods and Practice (FIN 4506)
  • Investments (FIN 4410)
  • Options, Futures and Derivative Securities (FIN 4510)
• Graduate
  • CFAR Practicum (FIN 5019)
  • Data Analysis for Investments (FIN 5321)
  • Derivative Securities (FIN 5241)
  • Financial Technology: Methods and Practice (FIN 5506)
  • Fixed-Income (FIN 5250)
  • Investment Theory (FIN 5320)
  • Options and Futures (FIN 5240)
  • Quantitative Finance Projects (FIN 5560)
  • Stochastic Foundations for Finance (FIN 5380)
  • Topics in Quantitative Finance (FIN 5018)
• Online Graduate
  • Data Analysis for Investments (FIN 6533) and Options and Futures (FIN 6524)

Teaching Philosophy

• Your success is important to us!
• Quantitative course
• Emphasis on practice
• Goal
  • Become fluent in modern investment theory and tools
• Approach
  • Practice
  • Intuition

Nutshell

• This class is all about holding assets
  • Real assets (land, buildings, equipment, and knowledge)
  • Financial assets (stocks, bonds, derivatives)
• Financial markets and the economy
  • The informational role of financial markets
  • Consumption timing
  • Allocation of risk
  • Separation of ownership and management
• Players in the financial markets
  • Firms
  • Households (individuals)
  • Government

Basic Principles of Finance

1. Investors are insatiable
   • Their utility (happiness) increases with real wealth
   • More wealth today increases current and/or future consumption
2. Investors are impatient
   • They prefer consumption now as opposed to in the future (present value of money)
3. Investors are risk-averse
   • They dislike uncertainty/risk
   • They require compensation to take on risky investments

The Investment Process

1. Define the investment objectives and constraints
   • Maximize (expected) return?
     • What about risk?
   • Maximize risk-adjusted (expected) return?
     • How to adjust for risk?
2. Evaluation and selection of securities
   • Asset allocation vs. security selection (Top-down vs. Bottom-up)
   • Technical vs. fundamental analysis
   • Other Issues: diversification, taxes, income vs. growth
3. Monitor performance relative to initial objectives and constraints

Classes of Securities

• Fixed Income - Money Market
  • Treasury Bills, CDs, Commercial Paper, Repurchase Agreements (SOFR)
• Fixed Income - Capital Market
  • Treasury Notes & Bonds, Corporate Bonds, Municipal Bonds, Federal Agency Debt, Securitized Assets, Eurobonds
• Equity
  • Common Stock, Preferred Stock

Classes of Securities (continued)

• Derivatives
  • Options, Forwards, Futures, Swaps, etc.
• Alternatives
  • Private Markets: Private Equity / VC, Private Credit (Direct Lending, CLOs)
  • Real Assets: Real Estate, Infrastructure, Commodities
  • Digital Assets: Crypto, Tokenized Assets

Fixed Income – Money Market

• Up to one year to maturity, highly liquid, low default risk
• Types of securities:
  • Treasury Bills
    • Issued by US Treasury (government borrowing)
    • Considered “largely” risk-free
  • CDs
    • Issued by depository institutions (i.e. commercial, savings banks and credit unions)
  • Commercial Paper
    • Issued by corporations
  • Repurchase Agreements (i.e. repos and reverse repos)
    • Typically overnight borrowing/lending between the banks

Fixed Income – Capital Market

• Over one year to maturity, various degrees of default risk
• Types of securities:
  • Treasury Notes & Bonds
    • Issued by US Treasury with maturities of up to 10 years for notes and between 10 and 30 years for bonds
    • Make semiannual interest payments
    • No/low risk of default
  • Corporate Bonds
    • Different maturities, default risk and payment structure (unsecured corporate bonds are called debentures)
  • Municipal Bonds
    • Issued by state and local governments
    • Tax-exempt status
  • Federal Agency Debt
  • Issued by government agencies (Freddie Mac, Fannie Mae, Federal Home Loan Bank etc.)
  • Securitized Assets
    • E.g., claims on a pool of mortgages

Equity

• Common Stock:
  • Shares of ownership in a firm
    • Voting rights
    • Dividends
  • Residual claim
  • Limited liability
• Preferred stock (somewhat like a bond):
  • No voting rights
  • Fixed dividends that cumulate if not paid (bond-like feature)

Derivatives

• A contract whose value depends on the price of an underlying asset
• Primary uses: speculation and hedging
• Options
  • One party has a right to trade, the other an obligation
  • Call: buyer has right to purchase; seller must sell if buyer exercises
  • Put: buyer has right to sell; seller must buy if buyer exercises
• Forwards and Futures
  • Both parties obligated to trade at a future date
  • Long position agrees to buy / short position agrees to sell
  • Forwards - Customized contracts negotiated privately
  • Futures - Standardized contracts traded on exchanges