Revision (CH5)

Question 1

Definition: Diversification

Answer 1

is a method of reducing the systematic risk of a portfolio by investing in various asset classes.

Question 2

What does the return of a portfolio depend on?

Answer 2

Returns of a portfolio depend on the asset allocation.

Question 3

List: Two asset classes.

Answer 3

Real assets
Financial assets

Question 4

Definition: Real assets

Answer 4

Involve some kind of tangible asset.

Question 5

Examples of real assets

Answer 5

Real estate, land, buildings and commodities such as gold.

Question 6

List: Characteristics of real assets

Answer 6

• Does not have the same liquidity as a financial asset.
• Information on its value is not always readily available.

Question 7

Definition: Financial assets

Answer 7

Legal claims to some future
benefit.

Question 8

Examples of financial assets

Answer 8

• Fixed income securities (Bonds, preference shares, savings accounts, treasury bills).
• Equity instruments (ordinary shares, warrants).

Question 9

List: Types of bonds

Answer 9

1. Secured bonds
2. Mortgage bonds
3. Collateral trust bonds
4. Equipment trust certificates
5. Debentures
6. Can also be senior or subordinated
7. Income bonds
8. Convertible bonds
9. Treasury bonds
10. Zero-coupon bonds

Question 10

List: Other investments

Answer 10

1. Unit trusts
2. Investment trusts
3. Hedge funds
4. Participation bonds
   schemes