Chapter 10 - Fundamentals of investing

Question 1

Steps in effective investment planning

Answer 1

1. establish your investment goals
2. determine the amount of money you need to obtain your goals (based on your goals)
3. specify the amount of money you currently have available to fund your investments
4. list different investments that you want to evaluate
5. evaluate the risk factor and the potential return for all investment alternatives
6. reduce possible investments to a reasonable number
7. choose at least 2 different investments (for diversification)
8. continue to evaluate your investment program

Question 2

5 components of the risk factor

Answer 2

• inflation risk
• interest rate risk
• business risk
• market risk
• global investment risk

Question 3

Tax considerations….

Answer 3

• Interest and rental income, net of expenses, is fully taxed
• Dividends and capital gains receive a more favourable tax treatment
• In order to ensure the most favourable tax treatment of your investment portfolio, it is best to hold interest-generating assets inside registered accounts such as RRSPs, RESPs, TFSAs, and dividend and capital gains generating assets in non-registered accounts
• Dividend tax credit
• Capital gains – 50%