FP 2 (3)- Investment and Tax Planning

Question 1

What are the 5 key assumptions in Modern Portfolio Theory

Answer 1

1. Risk Aversion
   - investors are risk averse and will only accept more risk if they have a potential for higher returns
2. Time Horizon
   - all investors will hold investments for the same time period
3. Expected Returns
   - assumes that investors gave the same expectations in future levels of returns from various investments
4. Borrowing Rate
   - everyone is able to borrow at the risk free rate
5. Perfect Market
   - information is freely available and insider info already priced in
   - unlimited amounts can be purchased without affecting the equilibrium price

Question 2

What is the main difference between fundamental and technical analysis

Answer 2

fundamental looks at everything except the stock price

technical studies the historical stock price

Question 3

Describe weak form, semi-strong form, strong form

Answer 3

Weak Form

• current and future market price have no relation to past prices
• fundamental analysis is useful

Semi-Strong Form

• stock price reflects all public information
• technical and fundamental analysis is useless

Strong Form
-stock price reflects all public information and private information

Question 4

What is Specified Investment Business

What is a Holding Company

Answer 4

Specified Investment Business: a business whose principal business is to derive income from property

Holding Company: a Canadian controlled private corporation where individuals hold their investments