12 Questions
What is the primary purpose of an investment?
To generate income and accumulate wealth
Which type of investment is insured with PDIC up to P500,000?
Investing in a Bank
What is the primary function of a managed fund?
To pool the money of various investors and invest in bonds, stocks, or a combination of various investments
What is the definition of risk in finance?
A chance of loss
What is an example of systematic risk?
A natural disaster such as a massive earthquake
What is the type of risk that affects only a small number of assets?
Unsystematic Risk
What type of event can negatively impact a firm's investors?
A major stockholder getting involved in a crime or scandal
What is the primary goal of diversification in investment portfolios?
To minimize unsystematic risk
What is the primary factor that determines an individual's risk tolerance?
Net worth and risk capital
What is the purpose of conducting due diligence in investment research?
To compare investment products and assets
What happens when an individual has a high net worth and substantial risk capital?
They are more likely to invest in high-risk investments
What is risk capital?
Money that, if lost on an investment, won't impact the financial position and lifestyle
Study Notes
Types of Investments
- Investing in a Bank: earns minimal interest, easily withdrawable, least risky, insured with PDIC up to P500,000
- Investing in Bonds: like an IOU issued by a government or company with a fixed interest rate called a coupon
- Investing in Shares of Stocks: buying a small part of a company, earning through dividends and capital gains as price increases
- Investing in Managed Funds: an investment company pooling money from various investors, investing in bonds, stocks, or a combination
- Investing in Property: earns through real property (real estate) or tangible personal property (gold, precious metals, artworks, etc.)
Risks in Investment
- Risk: a chance of loss, the chance that the actual return would be different from the expected return on an investment
- Systematic Risk: wider in scope, affects the entire market, almost impossible to avoid (e.g., natural disaster, major political event, pandemic)
- Unsystematic Risk: affects only a small number of assets, also referred to as specific risk (e.g., firm's employees on strike, major stockholder involved in a crime or scandal)
Ways to Minimize Investment Risks
- Determination of risk tolerance: understanding the type of risk, or the combination of types of risk, essential in reducing those risks
- Net worth and risk capital: determining factors in risk tolerance, higher net worth and risk capital allow for higher risk tolerance
- Conducting due diligence: researching investment instruments, checking history, earnings' growth, management team, and debt load
Learn about different types of investments, including those in banks, bonds, and more. Understand the characteristics of each investment type, such as risk levels, interest rates, and withdrawal options.
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