Introduction to Investments and Asset Allocation

An investment is the current commitment of resources for a period of time in the expectation of receiving future resources that will compensate the investor for the time the resources are committed, the expected rate of inflation, and the uncertainty of future payments.

The investor expects to be compensated for the time the resources are committed, the expected rate of inflation, and the uncertainty of future payments.

The main considerations for an investor when making an investment are the commitment of resources, the expectation of future compensation, and the factors of time, inflation, and uncertainty.

<p>The purpose of making an investment is to receive future resources as compensation for the current commitment of resources, considering factors such as time, inflation, and uncertainty.</p> Signup and view all the answers

<p>The components of the required rate of return are income, capital preservation, and capital appreciation.</p> Signup and view all the answers

<p>The real risk-free rate is usually positive because savers need compensation for giving up the right to consume today, and borrowers are willing to pay to be able to spend more than their current resources allow.</p> Signup and view all the answers

<p>The Fisher equation is used to calculate the nominal interest rate, real interest rate, and expected inflation rate in investments.</p> Signup and view all the answers

<p>Yes, interest rates can be negative, as evidenced by ex-post real rates, ex-ante real rates, and nominal rates in certain situations.</p> Signup and view all the answers

<p>The Fisher equation compensates investors for delaying consumption and for the loss of purchasing power caused by inflation.</p> Signup and view all the answers

<p>An example of when ex-post real rates can be negative is when the actual rate of inflation exceeds the real rate of interest earned on an investment.</p> Signup and view all the answers

<p>Yes, ex-ante real rates can be negative, as seen in situations where the expected rate of inflation exceeds the nominal interest rate.</p> Signup and view all the answers

<p>Nominal rates can be negative due to concerns about very weak world growth and deflation, as evidenced by the unprecedented situation in recent years.</p> Signup and view all the answers

<p>Deflation is the general decline in prices for goods and services, causing an increase in the purchasing power of money.</p> Signup and view all the answers

<p>The real risk-free interest rate is the exchange rate between future consumption and present consumption, representing the 'pure' rental rate on money in the absence of inflation and risk.</p> Signup and view all the answers

<p>Investors need compensation from three sources - the pure or real interest rate, inflation protection, and risk - in order to defer consumption and make investment decisions.</p> Signup and view all the answers

<p>The Fisher equation is used to calculate the nominal interest rate, real interest rate, and expected inflation rate in investments, providing insights into the effects of inflation on interest rates.</p> Signup and view all the answers