Investment principles Flashcards
Q: What is diversification in investing?
A: Spreading investments across assets to reduce risk
Term: Risk Tolerance
Definition: The level of investment risk a client is willing and able to accept.
Q: What is the relationship between risk and return?
A: Generally, the higher the potential return, the higher the risk.
Term: Volatility
Definition: A measure of how much an asset’s price fluctuates over time
Q: What is asset allocation?
A: The process of dividing investments across asset classes to manage risk and return.
Term: Correlation
Definition: A statistical measure of how two investments move in relation to each other.
Q: What is liquidity risk?
A: The risk of being unable to sell an investment quickly without significant loss.
Term: Time Horizon
Definition: The length of time a client plans to hold an investment before needing the funds.
Q: What are collective investments?
A: Pooled investment vehicles such as unit trusts, OEICs, and investment trusts.
Term: Passive Investment
Definition: A strategy aiming to replicate the performance of a market index.
Q: What is an active investment strategy?
A: Aiming to outperform the market through research and decision-making.
Term: Alpha
Definition: A measure of an investment’s performance compared to a benchmark.
Q: What is beta in investment terms?
A: A measure of an asset’s volatility relative to the market.
Term: Sharpe Ratio
Definition: A way to measure risk-adjusted return.
Q: What is pound-cost averaging?
A: Investing a fixed amount regularly to reduce the impact of volatility.
Term: Suitability
Definition: The process of ensuring an investment matches a client’s needs, goals, and risk profile.
Q: What are the main asset classes?
A: Equities, bonds, cash, and property.
Term: Gilt
Definition: A UK government bond — considered a low-risk investment.
Q: What is inflation risk?
A: The risk that rising prices erode the real value of returns.
Term: Ethical Investing
Definition: Choosing investments that align with moral, social, or environmental values.
