5016 - Investment and Financial Analysis - Personal Investment - Risk and Return p390 - 402

Question 1

Return comes from what two sources?

Answer 1

Income:

• Interest
• Dividend

Capital Appreciation
- Purchase vs Sale Price

Question 2

Risk associated to Interest Income

Answer 2

• Interest is payable by law so fairly certain it will be paid
• If using Fixed rate no volatility
• Floating Rate subject to volatility

Question 3

Risk associated to Dividend Income

Answer 3

• Companies not obligated to pay dividends to uncertain
• Only pay if profitable
• Dividend could eat away at companies goals
• Generally companies raise dividends gradually
• Impacted by Clientele Effect (Tax positions of shareholders)

Question 4

Capital Gains

Answer 4

Capital Gains is the profits on certain investments.

Some assets do not offer capital gains such as bank accounts

Question 5

Risk v Return

Answer 5

• Low Risk = Low Return
• Low Risk Investments (Government Bonds) offer high security over high returns
• High Risk Investments must entice with potentially high returns

Question 6

What defines an Efficient Portfolio

Answer 6

• Maximises Return for a given level of risk or

- Minimises Risk for a given return

Question 7

Pros of Diversifying

Answer 7

Can protect against short term profit/return fluctuations

Question 8

Cons of Diversifying

Answer 8

• Lack of specialist skills

- More efficient to use markets you know

Question 9

Two Types of Risk

Answer 9

Market Risk

Specific Risk

Question 10

Market Risk Definition

Answer 10

Economy-wide risk which applies to all investments to varying extent depending on the market and how it if impacted by the specific conditions

Question 11

Specific Risk Definition

Answer 11

Risk that relates to a particular investment and is diversifiable. e.g. Bitcoin is safer than Shiba, I have $1000 in each so could move $500 from the riskier investment into the safer one