Question

CASE – 1: (Based on Ch-1: Investing Setting) –

Soon after your graduation, you would be all set for your career path. As you have studied and learnt several investment and portfolio related theories and concepts, you would be interested to start investing and creating portfolio right from the beginning phase of your career. Before you start doing so, it would be ideal to recap those important concepts and theories. You may want to write down those in brief especially covering the following:

(a) How do you think about your required rate of return? What affects the required rate of return? What would be your perspective on risk?

(b) Suppose you learn about two good investment options and you would like to evaluate both of them. You will have AED 10,000 available for making the investment. The GLuck investment is expected to generate a return of 15.5% with a standard deviation of 8.2% while the SLuck investment is expected to generate a return of 9.8% with a standard deviation of 5.3%. Given a small saving of AED 10,000, you would be interested to invest in only one option. Which one would you choose and why?

Answer 1

a) generally investors views requires rate of return from the view oint of risk that he assumed. It should be more than the rate of return for the risk free securities and bonds. required rate of return is affected by many factors.some of them are:cost of debt, risk free rate, interest rates on bank deposits and other invesment platforms etc.

risk is the chance that the real returns may deviate from the expected returns.the higher the risk the higher the return,the lower the risk the lower the return.risk in bank deposits are generally less as the deposits are safe but generated lower returns.

b) which investment should the investor select is based on his risk apetite. if i was to select on one of the two, then i will be choosing GLuck investment as the returns are more than the SLuck investment returns. at the same time the risk is also more in Gluck invesments, but as i already said higher the risk higher the return.