Investing & Portfolio Diversification

Question 1

Types of Investments

Answer 1

• passive investments (interest, dividends, capital gains)
• strategic investments (enhanced operations from investing)

Question 2

Types of Returns

Answer 2

• on fixed income security = interest + CG/L on sale
• on shares = dividend + CG/L 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

Question 5

Risk

Answer 5

• possibility that actual return will be different than expected
• measured by standard deviation

Question 6

What is priced lower - higher or lower risk investments?

Answer 6

• higher risk priced lower (Ex: shares that dropped in value are riskier investments)

Question 7

Expected Return

Answer 7

• average of possible returns for the next year
• 30% of 35% return + 70% of 20% return = (0.30*0.35)+(0.70+0.20)=0.105+0.14 = 0.263 * 100% = 26.3% expected return

Question 8

Votality

Answer 8

• the spread between lowest possible return and highest possible return
• high votality = larger spread

Question 9

Covariance & Correlation

Answer 9

• measure the relationship between the returns of 2 investments
• correlation between +1 and -1 … closer to +1 means more correlated
• covariance is the measure of how the stocks move together

Question 10

Portfolio theory

Answer 10

• holding large amount of investments with returns that are negatively correlated ensures that the average of the returns will be close to what is expected/wanted

Question 11

Total risk

Answer 11

• measure by standard deviation
• total risk = systemic risk + unsystemic risk

Question 12

Unsystemic risk

Answer 12

• diversifiable risk / unique risk
• the portion of total risk that is unique to the security
• Ex) management, labour, competition

Question 13

Systemic risk

Answer 13

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

Question 14

Capital Asset pricing model

Answer 14

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

Question 15

Portfolio objectives

Answer 15

• capital preseveration, annual income
• to be considered when making investment decision

Question 16

bottom up investing

Answer 16

• looking at the company and then investing

Question 17

top down investing

Answer 17

• investing based on the economy

Question 18

Debentures

Answer 18

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

Question 19

Equity investment

Answer 19

holding direct shares (Common or preferred shares)

Question 20

Strategic investment

Answer 20

• subsidiaries, associates and joint arrangements