Question 1

Cash investments aim to provide:

Accepted Answer

Cash investments typically aim to provide income, liquidity, and stable returns. They are considered low-risk investments and are sought after for their ability to offer easy access to funds (liquidity) and a steady, albeit modest, income stream without the promise of high returns or a hedge against inflation.

Question 2

With regard to shares as an asset class, nominate the correct statement below:

Accepted Answer

D

Question 3

In finance, risk may be defined as:

Accepted Answer

Risk can be defined as a combination of all the choices given. The chance of a loss of capital, loss of purchasing power, and variability of returns are all factors that contribute to the overall risk of an investment or financial decision. Therefore, the best choice is D, all of the above.

Question 4

Given the information provided below, which of the following share investments is clearly preferred to the others? $\begin{array} { l l l } 
\text { Investment } & \begin{array} { l } 
\text { Standard } \
\text { Deviation }
\end{array} & \text { Return } \
\text { Tee Enterprises } & 13 \% & 9 \% \
\text { Scamander Trading } & 12 \% & 6 \% \
\text { Bouble Holdings } & 15 \% & 6 \%
\end{array}$

Accepted Answer

The answer of Given the information provided below, which of...

Question 5

The relative investment performance of the major asset classes in the last 10 and 20 years as included in the text shows:

Accepted Answer

The answer of The relative investment performance of the major...

Question 6

The importance of the efficient frontier lies in the fact that it:

Accepted Answer

The efficient frontier is a curve that shows the optimal mix of return and risk for a portfolio of investments given a required level of risk. It also helps in identifying where the most efficient portfolios are and demonstrates how diversification lets investors improve their efficient risk/return ratio. Therefore, all of the above options are important features of the efficient frontier.

Question 7

Gibson (2000) studied the effects of using multiple asset classes (2, 3 or 4 asset classes) for portfolio investing. He concluded that:

Accepted Answer

Gibson (2000) found that using a combination of all 4 asset classes over a period of time would result in the highest long-term average return with a lower level of risk than other asset class combinations. Therefore, the best choice is D.

Question 8

With regard to the benefits of diversification, nominate the incorrect statement:

Accepted Answer

The riskiness of a portfolio is not simply a weighted average of the standard deviations of the individual shares in the portfolio. It also depends on the correlation between the returns of the assets in the portfolio. The standard deviation of a portfolio considers the covariance or correlation between the returns of the assets, not just the weighted average of their individual standard deviations.

Question 9

Markowitz's modern portfolio theory assumes that there are two asset types being:

Accepted Answer

Markowitz's modern portfolio theory assumes that there are two asset types: risky and risk-free assets. This theory suggests that by combining assets with different levels of risk, investors can create portfolios with the optimal balance between expected returns and risk. Therefore, the correct answer is C.

Question 10

In terms of behavioural theory, overconfidence can result in:

Accepted Answer

Overconfidence in individuals can lead to them believing that they can regularly beat the market, which is a deviation from rational thinking when there is an element of uncertainty.

Question 11

When selecting suitable products for investment, personal investors often are attracted to property as an asset class because:

Accepted Answer

Property is often seen as a suitable investment option for personal investors because it has the potential to provide returns that keep pace with inflation, providing a hedge against inflationary pressures. Additionally, property is a tangible asset, meaning investors can see and touch it, which offers a sense of security that is not often associated with other asset classes. Therefore, both options A and B are correct, and the correct answer is C.

Question 12

With regard to listed property as an asset class, nominate the correct statement below:

Accepted Answer

Option A is correct as both A-REITs and unlisted property trusts are pooled investments that hold a variety of properties and offer units to investors. Option B is incorrect as listed property trusts have risks similar to shares because they are traded on public exchanges. Option C is correct as property is a long-term investment with higher risk than fixed-interest investments but with a slightly lower risk historically than shares. Therefore, the correct statement is options A and C.

Question 13

Fixed-interest investments have the following characteristics:

Accepted Answer

Fixed-interest investments often pay interest regularly, but some do so at maturity or offer a discount upfront. They can be traded on the secondary market and are subject to credit risk, making options A and C incorrect.

Question 14

The enterprising or aggressive investor is characterised by:

Accepted Answer

The answer of The enterprising or aggressive investor is characterised...

Question 15

To be _ _% confident that the actual returns will lie in a given range, we simply determine the values of the expected return plus two standard deviations and the expected return minus two standard deviations, assuming the returns are normally distributed.

Accepted Answer

According to the empirical rule, 95% of the data falls within two standard deviations of the mean for a normally distributed dataset. Therefore, we can be 95% confident that the actual returns will lie within the expected return plus/minus two standard deviations.

Question 16

In terms of loss aversion theory it is generally accepted that investors:

Accepted Answer

Loss aversion theory suggests that investors experience more pain from losses than pleasure from equivalent gains, and this aversion can lead them to make decisions that are counter to the efficient market theory. Additionally, research has shown that investors are more likely to sell losing stocks than winning stocks, which is in line with loss aversion theory. Therefore, both options A and B are true, making D the best choice.

Question 17

Facts common to most investment scams include:

Accepted Answer

Investment scams typically do not provide a product disclosure statement and often promise returns much higher than bank deposits, making both A and B incorrect in the context of common characteristics of investment scams.

Question 18

Standard deviation:

Accepted Answer

Standard deviation measures the variability of returns around the expected return, and is not equal to the variance squared or the square root of expected return.

Question 19

The expected return on a portfolio is calculated as the:

Accepted Answer

The expected return on a portfolio is calculated as the weighted average return of individual shares in the portfolio, where the weights are the fraction of the total portfolio invested in each share. This accounts for the fact that different shares may constitute different proportions of the total investment.

Question 20

The mean and expected returns on an investment have the following relationship:

Accepted Answer

The mean return and expected return on an investment are equivalent terms, both representing the average outcome of an investment over a period, calculated by summing the possible returns weighted by their probabilities.

Quiz 4: Investment Choices