Question

1) have an understanding of the overall investment process and the key elements involved in the investment process such as asset allocation and security selection.  
2) have a basic understanding of debt, equity and derivatives securities.  
3) understand differences in the nature of financial and real assets; be able to identify the major players in the markets; differentiate between primary and secondary market activity;

Answer 1

Answer(1): Investment is done in two ways, whether you choose one security or asset or you choose multiple securities or asset class. To reduce the risk and to increase your return even in the lower market, you should invest your money into different sectors'. You should choose mutual funds that provide the best asset allocation and security selection, they have the fund managers and professional who analyze the risk involved in different securities and accordingly invest your money into some less risk, no risk and high risk securities as per your investment need. Your portfolio is balanced if you choose asset allocation.

Answer(2): Debt- It represents the loan, if you invest into debt, you get the interest or fixed income regularly (quarterly, semiannually and annually). Debt is a less riskier financial product. Examples: T-Bills, corporate bonds etc.

Equity- It represents the ownership in the company. It is a high risk product and it provides higher return. For example: Shares of the companies, equity mutual funds.

Derivatives- This product is used for hedging and arbitrage purpose. Examples: Futures, options, swaps etc.

Answer(3): Differentiate between primary and secondary market activity:

1. Primary market is a market where share is firstly issued to the public through Initial public offer while secondary market is a market where security trades after the listing.
2. Primary market does not involve exchange while secondary market involves exchange like NYSE, NASDAQ.
3. Investors purchase directly from the company in primary market while in secondary market, investors purchase the securities indirectly via exchange.
4. In primary market, buying and selling take place between company and investors, in secondary market, buying and selling take place between investors and investors.