Finance is the application of the principles of financial economics to an inter-related set of monetary problems. In the case of a company, this generally involves balancing risk and profitability and is typically called managerial finance or corporate finance. Investment theory is concerned with the identification of an optimal portfolio of assets, given a set of objectives and constraints, as well as with the valuation of assets. Finance can also be used by individuals (called personal finance), and by governments (called public finance).
Finance involves:
- Investment management and valuation
- Financial markets, financial instruments, and financial institutions
- The risk-return framework and the identification of the asset appropriate discount rate
- Valuation of assets - discounting of relevant cash flows; relative valuation; contingent claims valuation
- The optimum allocation of funds - What to invest in - How much to invest - When to invest
- Corporate finance
- Obtaining funds - debt or equity sources - long term or short term - optimum capital structure
- dividend policy
- allocation of funds to long term capital investments, vs optimize short term cash flow.
- Managerial finance
- Capital budgeting and managing of existing assets
- Cash flow budgeting and working capital management
- Comparing alternative proposals
- Forecasting and risk analysis
- Wealth management and personal finance
Links
- For a Hypertextual Finance Glossary see Prof. Campbell R. Harvey
- For material covering three areas in finance - corporate finance, valuation and investment management - see Prof. Aswath Damodaran
- For illustrative worked examples covering several of these topics
- For introductory articles covering mathematical finance
