Investing & Portfolio Diversification

Question 1

Investment Strategies

Answer 1

• Passive investments (interest, dividends, capital gains)
• Strategic investments (enhanced opertaions)

Question 2

Types of returns

Answer 2

• on a fixed income security = interest and capital gain or loss on sale
• on a share = dividends and capital gain or loss on sale

Question 3

Calculating return %

Answer 3

[(dividend or interest + current value ) - initial investment ] / initial investment

Question 4

Risk VS reward trade off

Answer 4

higher risk = higher reward
lower risk = lower reward
higher risk investments are priced lower, due to the taking on of risk (shares that decreased in value are priced lower and are very risky)

Question 5

Investment Risk

Answer 5

the possibility that actual return will be different than expected (measured by standard deviation)

Question 6

Expected Return

Answer 6

Average of possible returns in the next year (take the expected returns and the percentage that they are expected and calculate the average)

Question 7

Votality

Answer 7

the spread between lowest possible return and highest possible return
Higher spread= higher votality

Question 8

Covariance and Correlation

Answer 8

measure the relationship between the returns of 2 different investments
- correlation will be between +1 and -1 and the closer to +1, the more correlated they are
- covariance is the measurement of how the 2 stocks move together

Question 9

Portfolio theory

Answer 9

holding large amounts of investments with returns that are negatively correlated, ensures that average returns will be close to what is expected
- also consider portfolio objectives when making investment decision (capital preservation, annual income, etc)

Question 10

Total Risk

Answer 10

measured by standard deviation and made up of systemic risk +un- systemic risk

Question 11

Systemic risk

Answer 11

• non-diversifiable or market risk
• the risk that impacts many securities (exchange rate, inflation)
• measured by beta (if B=1.1 than that means that returns on that security are 10% more volatile than others in the portfolio)

Question 12

Un-systemic risk

Answer 12

• diversifiable or unique risk
• the portion of total risk that is unique to the security (management, labor, competition)

Question 13

Capital asset pricing model

Answer 13

• the idea that investors want to be compensated for the time value of money + risks associated
• risk free return + risk premium related to the risk of the investment

Question 14

Bottom up investing

Answer 14

looking at the company and then investing

Question 15

Top down investing

Answer 15

investing based on the economy and how the share prices are doing

Question 16

Debentures

Answer 16

bonds that are not secured by any specific asset but issued against credit of the corporation

Question 17

equity investment

Answer 17

directly holding shares in a company (common shares or preferred shares)

Question 18

strategic investment

Answer 18

subsidiaries, associates, joint arrangements