H E C K ☞ QUESTION 1 Are the following assets real or financial? a. Patents b. Lease obligations c. Customer goodwill d. A college education e. A $5 bill       1.2 FINANCIAL MARKETS AND THE ECONOMY   We stated earlier that real assets determine the wealth of an economy, whereas financial as- sets merely represent claims on real assets. Nevertheless, financial assets and the markets in which they are traded play several crucial roles in developed economies. Financial as- sets allow us to make the most of the economys real assets.     Consumption Timing   Some individuals in an economy are earning more than they currently wish to spend. Oth- ers-for example, retirees-spend more than they currently earn. How can you shift your purchasing power from high-earnings periods to low-earnings periods of life? One way is to "store" your wealth in financial assets. In high-earnings periods, you can invest your savings in financial assets such as stocks and bonds. In low-earnings periods, you can sell these assets to provide funds for your consumption needs. By so doing, you can shift your consumption over the course of your lifetime, thereby allocating your consumption to pe- riods that provide the greatest satisfaction. Thus financial markets allow individuals to sep- arate decisions concerning current consumption from constraints that otherwise would be imposed by current earnings.     Allocation of Risk   Virtually all real assets involve some risk. When GM builds its auto plants, for example, its management cannot know for sure what cash flows those plants will generate. Financial markets and the diverse financial instruments traded in those markets allow investors with the greatest taste for risk to bear that risk, while other less-risk-tolerant individuals can, to I. Introduction 1. The Investment Environment The McGraw−Hill