Risk

Question 1

Risk to davids inv trusts

Answer 1

Gearing may lead to Increased volatility - this may increase losses
May lack liquidity - if not traded daily
May be trading at a discount when David wishes to sell - so proceeds may not reflect underlying value
Equity - could go down in value
Currency -
Taxation - could increase the income and capital gains taxes paid in the futur
Investment may be negatively impacted by political - and market changes
Lack of Diversification -mainly in equity
Dividend income not guaranteed

Question 2

Key risks associated with David and June’s cash holdings

Answer 2

1) inflationary risk - spending power eroded over time
2) default risk - only £85,000 of David’s cash is covered by the FSCS
3) interest rate risk - rates could fall/remain low
4) taxation risk - tax rules may change and increase tax payable on interest in future

Question 3

Risks associated with holiday cottage

Answer 3

1) illiquid asset - may be a problem if need cash quickly
2) changes in legislation - may lead to increased amount of CGT payable on sale
3) cost of purchase - and upkeep may be higher than expected
4) overall portfolio will have high exposure to property - property prices may fall