Question

TYPE ANSWERS

1.

• Know the basic concept of investing, why investing is important, and the idea that money can work for you

• Understand and be able to apply the basic rule of 72

• Be familiar with the different types of investing, as well as risks associated with investing

• Explain the relationship between risk and return, identify different investments and the associated risk and

  return with each

Answer 1

The basic concept of investing is to invest money in financial instruments or real estate to enable these assets to grow in value over time such that by postponing consumption of money, we are able to get a larger sum of money tomorrow.

The rule of 72 states that the money doubles in a time given by 72/r years where r is the annual interest rate. So if the annual interest rate is 9%, then money will double in 72/9 ~ 8 years

Different forms of investing is active investing wherein we actively scout for asset class to generate returns that exceed the index or benchmark. While the passive form of investing is where one is content with investing in index funds and the returns generated are in line with the index only.

The investment philosophy is that one can generate greater return by undertaking more risks only. So return and risks have a direct relationship between them. The different investments are an investment in stocks, investment in bonds and investment in commodities such as gold or investment in real estate.

The stocks or equities provides the best returns on a long term, however the risk is that these are quite volatile in the short term. With regards to gold or real estate, they also generate decent returns but gold prices can also be volatile and real estate can be very illiquid.

The bonds give more principal protection but they give lower returns and the risk is from change in interest rates.