BBMF2023 Tutorial 1
BBMF2023 PRINCIPLE OF INVESTMENT
Tutorial 1: Introduction to Investment
1. “A risk-averse investor will not assume risk.” Agree or disagree with this statement, and explain your reasoning.
Disagree. Risk-averse investors will assume risk if they expect to be adequately compensated for it.
2. Summarize the basic nature of the investment decision in one sentence.
The basic nature of the investment decision for all investors is the upward-sloping tradeoff between expected return and risk that must be dealt with each time an investment decision is made.
3. Distinguish between expected return and realized return.
Expected return is the anticipated return for some future time period, whereas realized return is the actual return that occurred over some past period.
4. Define risk. How many specific types can you think of?
In general, the term risk as used in investments refers to adverse circumstances affecting the investor’s position. Risk can be defined in several different ways. Risk is defined here as the chance that the actual return on an investment will differ from its expected return.
Beginning students will probably think of default risk and purchasing power risk very quickly. Some may be aware of interest rate risk and market risk without fully understanding these concepts (which are explained in later chapters). Other risks include political risk and liquidity risk. Students may also remember financial risk and business risk from their managerial finance course.
5. What other constraints besides risk do investors face?
Return and risk form the basis for investors establishing their objectives. Some investors think of risk as a constraint on their activities. If so, risk is the most important constraint. Investors face other constraints, including:
time taxes transaction costs income requirements legal and regulatory constraints diversification requirement
6. What are institutional investors? How are
Tutorial 1: Introduction to Investment
1. “A risk-averse investor will not assume risk.” Agree or disagree with this statement, and explain your reasoning.
Disagree. Risk-averse investors will assume risk if they expect to be adequately compensated for it.
2. Summarize the basic nature of the investment decision in one sentence.
The basic nature of the investment decision for all investors is the upward-sloping tradeoff between expected return and risk that must be dealt with each time an investment decision is made.
3. Distinguish between expected return and realized return.
Expected return is the anticipated return for some future time period, whereas realized return is the actual return that occurred over some past period.
4. Define risk. How many specific types can you think of?
In general, the term risk as used in investments refers to adverse circumstances affecting the investor’s position. Risk can be defined in several different ways. Risk is defined here as the chance that the actual return on an investment will differ from its expected return.
Beginning students will probably think of default risk and purchasing power risk very quickly. Some may be aware of interest rate risk and market risk without fully understanding these concepts (which are explained in later chapters). Other risks include political risk and liquidity risk. Students may also remember financial risk and business risk from their managerial finance course.
5. What other constraints besides risk do investors face?
Return and risk form the basis for investors establishing their objectives. Some investors think of risk as a constraint on their activities. If so, risk is the most important constraint. Investors face other constraints, including:
time taxes transaction costs income requirements legal and regulatory constraints diversification requirement
6. What are institutional investors? How are