FIN533 Chapter 6: Investment Planning

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29 Questions

What is a key consideration when establishing investment goals?

Determining specific and measurable financial goals

What is an important aspect of assessing investment decisions?

Considering safety, risk, income, growth, and liquidity

What is a crucial step in preparing for an investment program?

Assessing personal economic circumstances and investment goals

What should investors consider when evaluating their investment goals?

Assessing the potential consequences of not meeting investment goals

What is an important aspect of an investment program?

Recognizing the importance of personal involvement

What should investors use to reduce risks and increase returns?

Various sources of financial information

What is a characteristic of bonds that has changed over time?

They traditionally offered variable interest rates

What happens to bond prices when interest rates increase?

They decrease

What is a key feature of a bond's maturity date?

It's the date the principal amount must be paid back in full

What type of property is being referred to in the context of real estate investment?

A real estate property not occupied by the owner

What is the primary goal of investing in real estate, according to the text?

To rent it out and sell or remortgage for a profit

What is a key benefit of investing in physical properties?

It is a less volatile investment compared to equities

Why do Asians tend to prefer physical asset investments?

Because of a cultural preference for physical assets

What is a key advantage of investing in REITs?

The ability to invest in real estate without directly managing properties

What is a key factor influencing the rate of return on property investments?

Population growth and income growth

What is the primary focus of property investment for long-term goals?

Large intrinsic value appreciation over a long period

What is the primary benefit of indirect investments in real estate?

Access to the real estate market without direct property management

What is the term used to describe the trade-off between risk and return in investment decisions?

Risk-Return Trade-Off

Which of the following is NOT a component of the risk factor?

Liquidity risk

What type of investments are characterized by predictable income?

Savings accounts and certificates of deposit

Which of the following investments offers the highest potential for growth?

Gemstones and collectibles

What is the term used to describe the ability to buy or sell an investment quickly without substantially affecting the investment's value?

Investment liquidity

What is the primary reason why growth companies pay little or no dividends?

To reinvest in the company

What is a major advantage of REITs compared to physical real estate investments?

Higher liquidity

What is the primary role of a fund manager in a unit trust?

To pool money from numerous investors to invest in a portfolio of assets

What type of unit trust provides investors with exposure to the stock market?

Equity Funds

What is a characteristic of Islamic Funds?

They are invested in companies approved by the ‘syariah’ or ‘halal’ counters only

What is the role of a trustee in a unit trust?

To act as an intermediary between the investment management company and the unit holders

What is a major difference between REITs and unit trusts?

REITs invest in physical properties, while unit trusts invest in financial assets

Study Notes

Investment Planning

  • Establishing an investment program is essential to achieve financial goals.
  • To develop investment goals, ask yourself:
    • What will you use the money for?
    • How much will you need for your goals?
    • How will you obtain the money?
    • How long will it take you to obtain the money?
    • How much risk are you willing to assume in an investment program?
  • Consider the consequences of not reaching your investment goals.

Types of Investments

  • Real Estate Investment Trust (REITs):
    • Own, operate, or finance income-producing properties.
    • Generate a steady income stream for investors with little capital appreciation.
    • Highly liquid, unlike physical real estate investments.
    • Invest in various property types, including apartment buildings, cell towers, and offices.
  • Unit Trust:
    • Also known as managed investments.
    • Allow fund managers to pool money from numerous investors to invest in a portfolio of assets.
    • Help investors tap the expertise of professional fund managers to boost returns.
    • Parties involved: unit holder, investment management company, and trustee.
    • Types of unit trusts: equity funds, fixed income funds, Islamic funds, and property trust funds.

Bond Investment

  • Definition: fixed-income instrument that pays a fixed interest rate (coupon) to debt holders.
  • Characteristics:
    • Inverse correlation with interest rates: when rates go up, bond prices fall.
    • Maturity dates when principal amount must be paid back in full or risk default.
  • Types of bonds: not specified.

Real Estate Investment

  • Definition: investing in property to rent out, cover mortgage repayments, and sell for a profit or to purchase more property.
  • Investment in: residential houses, flats, standard lots, condominiums, and shop houses.
  • Factors to consider:
    • Population and growth
    • Scarcity of land
    • Speculation
    • Supply and demand
    • Income growth
    • Economic activities
  • Indirect investments in real estate: Real Estate Investment Trust (REITs).

Factors Affecting the Choice of Investments

  • Risk-Return Trade-Off: higher potential returns come with higher risk.
  • Components of the risk factor:
    • Inflation risk
    • Interest rate risk
    • Business failure risk
    • Market risk
    • Global investment risk
  • Factors affecting investment income:
    • Safest investments: predictable income (savings accounts, certificates of deposit, savings bonds, government treasury bills)
    • Higher potential income investments: corporate bonds, preferred stocks, income mutual funds, real estate rental property
  • Factors affecting investment growth:
    • Common stock
    • Growth companies
    • Mutual funds, government and corporate bonds, and real estate
    • Gemstones and collectibles (more speculative)
  • Investment liquidity:
    • Ability to buy or sell an investment quickly without affecting its value.
    • Examples: stocks, bonds, and real estate.

This quiz covers the importance of establishing an investment program, assessing investment decisions, and recognizing the role of asset allocation and different investment alternatives. It also explores the use of financial information sources to reduce risks.

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