2.1 Financial Mathematics (Risk & Return of Investments)

Question 1

How is risk defined?

Answer 1

Risk is the possibility that actual returns will be different from expected returns.

Risk encompasses both downside potential
(the possibility of lower income, or erosion of capital invested) and upside potential (the possibility
of higher income, or capital growth)

Question 2

What is an asset class?

Answer 2

A asset class is a group of investments that share the same general characteristics, for example, gilts, German Bunds or US Treasury securities

Question 3

What are the main asset classes in the UK, in order of highest risk / return?

Answer 3

1. Ordinary Shares
2. Preference Shares
3. High Yield Bonds
4. Investment Grade Bonds
5. Gilts / Bunds / US Treasuries