KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

ACADEMIC YEAR 2016/2017

BBMF2023 PRINCIPLE OF INVESTMENT

Tutorial 1: Introduction to Investment

1. 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.

2. One of the attributes of investment is to break down the investment into categories. Define
THREE(3) categories of investment.
i. Securities or property. Securities includes stocks, bonds, options. Real property
includes land and building. Tangible personal property includes gold, artwork,
antiques, collectables.
ii. Direct or indirect. Direct: investor directly owns a claim on a security or
property. Indirect: investor owns an interest in a professionally managed
collection of securities or properties
iii. Low risk or high risk. Risk: the uncertainly surrounding the return that a
particular investment will generate

3. Define risk, and explain its relationship with return.

-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.
-It is a positive relationship with return, when the risk is increasing, the return should be
increasing as well to compensate the investor for taking the risk. Its relationship is shown as
a positive linear upward-sloping in the risk and return trade-off.

4. Explain other constraints besides risk do investors face?

Risk and return from the basis for investors establishing their objectives.
Some investors think of risk as a contrainst on their activities.
If so, risk is the most important constraint
Investors face other constraints including, such as time, taxes, transaction costs, income
requirements, legal and regulatory constraints and diversification requirement

5. Who are institutional investors? Explain how their action affect the investing environment.
 Institutional Investors include bank trust departments, pension funds, mutual funds
( investment companies), insurances companies, and so forth.
Basically, these financial institutions own and manage portfolios of securities on behalf of
various clienteles
They affect the investing environment ( and therefore individual investors) through their
actions in the marketplace, buying and selling securities in large dollar amounts that lead to
the volatility of the stock prices.
However, although they appear to have several advantages over individuals (research
departments, expertise, etc); reasonably informed individuals should ne able to perform as
well as institutions, on average, over time. This relates to the issue of market efficiency.

6. Investors should always seek to maximize their return from investing. Agree or disagree
Disagree. Id investors sought only maximize their returns, they would purchase due the
riskiest assets, ignoring the risk they would be taking.
Once again, investors must seek a balance between expected return and risk.

7. Differentiate direct investing and indirect investing.

Direct investing involves the purchase and sale of securities or properties where investor
has direct claim on it.

Indirect investing involves the purchase and sale of a portfolio managed by financial
intermediaries where investor owns an interest in a professionally managed collection of
securities or properties.

8. Common stock represents an ownership share of a corporation, and investor can get two
sources of return from it. Define the two form of return. Do all common stocks pay
dividends? Who decides?
-Two form of return from stocks are dividend and capital gain
-There is no requirement for a company to pay a dividend on the common stock.
-Any payment is decided by the company ‘s board of directors, who can change the
dividend (or abolish) at any time.

9. Briefly explain the types of investment that you aware of.

The types of investment is short-term Investments (marketable securities). Conservative

investments with lives of 1 year or less. This investment provide high liquidity.

Secondly, Common Stock represents an ownership share of a corporations and return

comes through dividends and capital gains

Thirdly, Fixed-income Securities includes bonds, convertible Securities and preferred stock.

-short term investment

- are conservative investments with lives of 1 year or less
 -Provide high liquidity

-Common stock
-Represents an ownership share of a corporations
- Return comes through dividends and capital gains

-Fixed-income Securities
- Bonds
- Convertible Securities
- Preferred stock

Mutual funds
-Portfolio of stocks, bonds, and other securities created by pooling the funds of many
different investors
- Allow investors to construct diversified portfolios without investing a lot of money.

Exchange-traded funds (ETF’s)

-Like mutual funds, except ETF shares trade on exchange, so investors can buy and sell
them at any time that exchanges are open for trading.

Hedge Funds
-Funds that pool resources from different investors, but usually have higher minimum
investments and less regulated than mutual funds.

Derivatives
-Include options and futures contracts
-Securities that derive their value from some underlying asset (e.g. a share of stock or a
commodity)

Other Popular Investments

-Real estate
-tangible

10. People tend to have different investment philosophies as they go through different stage of
life cycle. Using example, explain the stage of life cycle and how investor should form their
investment in different stage.

The first stage is Growth-oriented youth stage (age: 20 to 45). For example, twenties and
thirties, growth-oriented investments, higher potential growth; Higher potential risk and
stress capital gains over current income.

The second stage is Middle-Aged Consolidation Stage (Ages 45 to 60). For examples,
Family demands & responsibilities become important (education expenses, retirement
savings). Move toward less risky investments to preserve capital. Transition to higher-
quality securities with lower risk.

The last stage is Retirement Stage (Ages 60 and older). Preservation of capital becomes
primary goal. Highly conservative investment portfolio. Income needed to supplement
retirement income.
– Investor can invest in different assets to meet different objective throughout the stages of
life cycle.
-For instance: Investor can invest in common stocks, futures, and options for growth
oriented youth stage.
-Subsequently, they can invest in low-risk growth and income stocks, preferred stocks,
convertible stocks, high-grade bonds in middle age consolidation stage
- Hence, they can invest in low-risk income stocks and mutual funds, government bonds,
quality corporate bonds, bank certificates of deposit in the retirement stage.