Chapter 5 - Investments

Question 1

How do you calculate your risk premium?

Answer 1

Nominal rate of return - risk-free rate (t-bills)

Question 2

What are the 8 sources of risk?

Answer 2

Business risk
Financial risk (default risk)
Liquidity risk
Exchange rate risk
Country risk
Inflation risk
Interest rate risk
Market risk (systemic risk)

Question 3

What is the Fisher equation?

Answer 3

Depicts the relationship between nominal rates, inflation, and real rates
(1 + real rate) = (1 + nominal rate) / (1 + expected inflation rate)

Question 4

What is another term for market risk?

Answer 4

Systemic risk

Question 5

Which 3 components do you take into account when calculating investment rate of return?

Answer 5

1. Economic benefit
2. Financial cost
3. Opportunity cost

Question 6

What are the options if an RESP beneficiary fails to attend a post-secondary educational institution?

Answer 6

If no further education has been pursued by the time the beneficiary is 21 and the RESP has been in existence for 10+ years, subscriber can withdraw RESP earnings (accumulated Income payments AIPs)
AIPs may be transferred (up to $50K) into subscriber’s or spouse’s RRSP
AIPs withdrawn are a taxable event

Question 7

How much is CESG?

Answer 7

20% grant on the first $500 of annual contributions (40% for low-income families) and additional 20% on the next $2,000
Lifetime limit of $7200

Question 8

Is an RESP beneficiary who is 16-17 eligible for CESG?

Answer 8

Only if they met specific contribution requirements in the years prior to age 16…
unsure of what these are