Investmente Theory

February 26, 2013
26 February 2013 12:11

Modern Investment Theory- Robert A. Haugen – Fourth edition By Prentice Hall Class notes will be 80% of what we need to do well in course---------------------------------------------------------------------------------------------------------------All of Israel's institutions are relatively young and developed much later than their colleagues in theworld. Its important to understand how the current situation developed. In the 50s and 60s their was a small market in the Israeli stock exchange. There were about 30 big companies that traded. Themerchants gathered together every day and made exchanges, but what was interesting was the system of the trade. Every morning, every traders collected his order from all of his clients and gathered themtogether. Each member of the exchange (maybe 10 of them) said for example, my client wants to buy 20 shares of Bank Leumi, and the clerk collected the orders and assessed whether there was an excesssupply or demand. If for example, there was an excess demand of 100 shares of Bank Leumi, the clerk would ask if anyone wanted to sell. He would raise the price and ask again (and repeat this process),until the demand and supply were balancing. IN the 70s, high inflation started in Israel. We should understand another story: the government was very involved in the capital market. They issues lotsof bonds to the pension funds. They indexed all assets and liabilities and regulated the market and banking. The main investment at time was government bonds, which secured the inflation and a littlemore. There was a lot of competition between Leumi and HaPoalim. The two CEOs were very ambitious and fought to have the biggest bank. They took more loans to increase funds, and the supervisors ofthe banks has certain regulations the banks had to uphold in the capital maintained relative to loans. So, there is high inflation, government bonds closely linked to inflation, so how could banks...