Investments Overview and Financial Instruments
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Investments Overview and Financial Instruments

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Questions and Answers

What is the main objective of investing?

  • To spend money on non-essential items
  • To grow wealth over time while managing risks (correct)
  • To avoid financial responsibilities
  • To borrow funds from institutions

    • Which market is known for being the largest and most liquid?

  • Commodities Market
  • Bonds Market
  • Derivatives Market
  • Foreign Exchange (FOREX) Market (correct)

    • What type of investment does a bond represent?

  • A long-term debt security (correct)
  • A derivative contract
  • Ownership in a company
  • A commodity trade

    • What do debt instruments typically represent?

    <p>Loans made by investors</p> Signup and view all the answers

    What is a key feature of derivatives?

    <p>They derive their value from an underlying asset</p> Signup and view all the answers

    Which of the following is NOT a financial instrument?

    <p>Dividends</p> Signup and view all the answers

    What can investors expect from investing in commodities?

    <p>Gains from price fluctuations of raw products</p> Signup and view all the answers

    What does the priority of preferred stock over common stockholders imply?

    <p>Preferred stockholders receive dividends first</p> Signup and view all the answers

    What is the primary role of the Philippine Stock Exchange (PSE)?

    <p>To enforce listing requirements and monitor trading activities</p> Signup and view all the answers

    Which market is characterized by the initial issuance of new securities?

    <p>Primary market</p> Signup and view all the answers

    What does weak form efficiency imply about price movements?

    <p>Past trading information is reflected in current prices</p> Signup and view all the answers

    What must companies disclose to help investors make informed decisions?

    <p>Financial information and material changes</p> Signup and view all the answers

    In an efficient market, how are securities prices expected to behave?

    <p>They reflect true value and all available information</p> Signup and view all the answers

    What is the function of the secondary market?

    <p>To allow buying and selling of already issued securities</p> Signup and view all the answers

    What does semi-strong form efficiency indicate?

    <p>Publicly available information is reflected in current prices</p> Signup and view all the answers

    Why is the primary market considered crucial for businesses?

    <p>It enables them to raise capital for expansion or new projects</p> Signup and view all the answers

    What aspect of investing does an investor’s comfort with volatility relate to?

    <p>Risk tolerance</p> Signup and view all the answers

    Which investment type is typically associated with short-term goals?

    <p>Bonds</p> Signup and view all the answers

    How does a longer time horizon generally affect an investor's risk tolerance?

    <p>It allows for higher risk.</p> Signup and view all the answers

    For an investor saving for retirement in 40 years, what can be inferred about their risk tolerance?

    <p>They can accommodate higher risk.</p> Signup and view all the answers

    What demographic factor significantly influences investment risk tolerance?

    <p>Age</p> Signup and view all the answers

    An investor near retirement is likely to have what kind of risk tolerance compared to a younger investor?

    <p>Lower risk tolerance</p> Signup and view all the answers

    What investment goals would typically require a lower risk investment strategy?

    <p>Short-term needs</p> Signup and view all the answers

    Which of the following scenarios exemplifies short-term investment goals?

    <p>Saving for a vacation next summer</p> Signup and view all the answers

    What is the primary purpose of commercial paper?

    <p>To raise funds for short-term operational needs</p> Signup and view all the answers

    Which of the following best describes a futures contract?

    <p>An agreement to buy or sell an asset at a predetermined future date</p> Signup and view all the answers

    What does 'total return' include?

    <p>The sum of capital gains and income from dividends or interest</p> Signup and view all the answers

    Which body oversees and regulates the securities markets in the Philippines?

    <p>The Securities and Exchange Commission (SEC)</p> Signup and view all the answers

    What is a key feature of electronic trading platforms?

    <p>They allow for automated trade execution based on matching orders</p> Signup and view all the answers

    Which of the following statements accurately describes dividends?

    <p>Dividends are regular income received from an asset at a set price</p> Signup and view all the answers

    What is the role of the Securities and Exchange Commission (SEC)?

    <p>To enforce laws and ensure compliance within securities markets</p> Signup and view all the answers

    Which of the following is a feature of securities markets?

    <p>They facilitate the flow of capital from investors to various entities</p> Signup and view all the answers

    What distinguishes tactical asset allocation from strategic asset allocation?

    <p>Tactical asset allocation allows for short-term adjustments.</p> Signup and view all the answers

    How is the rebalancing process characterized in strategic asset allocation?

    <p>Rebalanced periodically to maintain a consistent allocation.</p> Signup and view all the answers

    What is a common approach that combines both strategic and tactical asset allocation?

    <p>Core-satellite investing.</p> Signup and view all the answers

    In tactical asset allocation, what is the focus when selecting investments?

    <p>Identifying specific market opportunities.</p> Signup and view all the answers

    Which aspect is essential for constructing a portfolio in strategic asset allocation?

    <p>Aligning with client's financial goals and risk tolerance.</p> Signup and view all the answers

    What is the primary goal of diversification in portfolio construction?

    <p>To minimize risk while maximizing returns.</p> Signup and view all the answers

    Which statement about management styles in asset allocation is correct?

    <p>Strategic management follows a passive, long-term approach.</p> Signup and view all the answers

    In the context of investment objectives, which statement is true regarding tactical asset allocation?

    <p>Adjustments are made based on short-term market conditions.</p> Signup and view all the answers

    Study Notes

    Investments Overview

    • Main objective of investing is to grow wealth over time while managing risk.
    • Investing empowers individuals with financial security and independence.
    • It involves allocating money into assets or ventures, expecting to generate income or profit.

    Financial Instruments

    • Contracts that establish financial assets for one party and financial liabilities or equity instruments for another.
    • They are used to raise funds, manage risk, or speculate on market movements.
    • Types include: 
      • Commercial Paper
      • Futures Contracts
      • Derivatives
      • Foreign Exchange
      • Commodities
      • Preferred Stock
      • Debt Instruments
    • Debt instruments are loans made by investors to corporations, governments, or other entities.
    • The borrower agrees to pay interest and repay the principal at a specified maturity date.
    • Debt instruments include bonds and commercial papers.
    • Bonds are long-term debt securities with fixed interest rates and low risk.
    • Commercial papers are short-term unsecured promissory notes issued by companies for short-term borrowing needs.

    Securities Markets

    • Platforms where financial instruments like stocks, bonds, and securities are bought and sold.
    • They facilitate capital flow from investors to companies and governments, enabling them to raise funds.
    • There are two main types of markets:
      • Primary Market - new securities are issued and sold for the first time.
      • Secondary Market - securities that were previously issued are bought and sold among investors.

    Electronic Trading

    • Modern securities markets have shifted towards electronic trading platforms for faster and more efficient transactions.
    • Example: the Philippine Stock Exchange (PSE) has an electronic trading system.

    Market Efficiency

    • Refers to how well prices in the market reflect all available information.
    • In an efficient market, securities prices should always reflect their true value, making it difficult to consistently achieve higher returns without taking on additional risk.
    • Forms of Market efficiency include:
      • Weak-form efficiency: Past trading information is reflected in current prices.
      • Semi-strong form efficiency: All publicly available information is reflected in current prices.

    Key Regulatory Bodies

    • Securities and Exchange Commission (SEC) oversees the securities markets in the Philippines.
    • SEC enforces laws, ensures compliance, and monitors market activities to protect investors and maintain market integrity.
    • The Philippine Stock Exchange (PSE) plays a regulatory role by enforcing listing requirements, monitoring trading activities, and ensuring listed companies adhere to disclosure requirements.

    Regulatory Measures

    • Disclosure Requirements - Companies must disclose financial information, material changes, and other relevant data to the public.

    Investment Goals

    • Investment goals drive individual investment strategies. 
    • Understanding investment needs:
      • Risk Tolerance: Investors' comfort level with potential losses.
      • Investment Horizon: The length of time an investor plans to keep their money invested.
      • Previous Investing Experience: Prior investment knowledge and experience.
      • Investment Goals: What an investor wants to achieve with their investments.

    Strategic vs. Tactical Asset Allocation

    • Two main approaches to asset allocation:
      • Strategic Asset Allocation: Long-term approach focused on setting target percentages for various asset classes.
      • Tactical Asset Allocation: Short-term approach that allows for adjustments based on market conditions.

    Portfolio Construction

    • Involves creating a tailored investment strategy that aligns with a client's financial goals, risk tolerance, and time horizon. 
    • Process involves:
      • Understanding the Client's Needs
      • Selecting Investments
      • Diversifying the Portfolio
      • Monitoring and Rebalancing

    Diversification

    • A key principle in portfolio construction aimed at reducing risk by spreading investments across different asset classes.

    Active and Passive Management

    • Active Management Involves actively buying, selling, and rebalancing investments to outperform the market.
      • Requires extensive research and market knowledge.
    • Passive Management Involves investing in an asset class and holding it for a long period.
      • Allows investors to earn market returns with lower costs.

    Core-Satellite Investing

    • A blend of active and passive management, combining a core portfolio of assets with active satellite investments.

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    Related Documents

    Investment and Portfolio Management PDF

    Description

    Explore the fundamentals of investing and the various financial instruments used in the market. This quiz covers the objectives of investing, types of financial instruments, and the intricacies of debt securities. Test your knowledge and understanding of how to grow wealth while managing risk.

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