10 Questions
What is the principle of the risk-return trade-off?
Higher risk is always associated with higher returns
What is the relationship between potential return and uncertainty according to the text?
High potential return with high uncertainty
Why is it important to diversify investments?
To minimize the possibility of losses and spread the risk
Why is it advised to seek advice from an investment consultant?
To understand the risks and uncertainties involved in investments
What does investing allow according to the text?
Letting money work instead of working hard for it
What is the major disadvantage of investing according to the text?
Investing poses the possibility of losing money.
Why are stock prices said to fluctuate according to the text?
Stock prices fluctuate based on market competition and public confidence.
What is emphasized as the best way to ensure funds are available after retirement?
Invest earned money from employment.
What advantage does a time deposit offer over a savings account?
Higher interest rates and flexibility in withdrawals.
Why are bank investments considered safer compared to investments in the stock market?
Bank deposits are insured and guaranteed by an entity like PDIC.
Study Notes
Risk-Return Trade Off
- Risk is the possibility of future earnings and free cash flows being lower than expected.
- The risk-return trade-off principle states that potential return increases with an increase in risk.
- Low levels of uncertainty or risk are associated with low potential returns, while high levels of uncertainty or risk are associated with high potential returns.
- Invested money can render higher profits only if the investor is willing to accept the possibility of losses.
Introduction to Investment
- Investing is a process of making money grow and generating returns.
- Each type of investment has its own level of risk and return.
- Higher potential returns are associated with higher risks or uncertainties.
- A mix of different investment types can help minimize risk and achieve targeted results.
- Research and consulting with an investment expert are essential to understand the risks and other investment matters.
Advantages of Investing
- Investing allows money to work instead of working hard for the money.
- Investing earned money from employment can provide needed funds after retirement.
- Determining a good return on an investment can maximize earning potential.
Disadvantages of Investing
- The major disadvantage of investing is the possibility of losing money on investment opportunities.
- Even seemingly secure investments, such as real estate, are not guaranteed to return a profit unless there are buyers.
- Stock prices fluctuate based on market competition and public confidence.
Investment Options
- Savings Account:
- Excess funds can be deposited in a savings account in any bank.
- Money saved in a bank earns minimal interest, making it not ideal for long-term growth.
- Funds can be easily withdrawn in case of need or for other productive purposes.
- Savings deposits are insured with the Philippine Deposit Insurance Corporation for a maximum amount of ₱500,000.00.
- Time Deposit:
- Excess funds can be placed in time deposits to earn a higher rate of interest.
- Time deposits have a fixed term, and withdrawal within the fixed period will result in a lower interest rate.
- Advantage: Security, with bank deposits insured and guaranteed by the Philippine Deposit Insurance Corporation (PDIC) for a maximum amount of ₱500,000.00.
- Disadvantage: Painfully low returns on these financial services.
Test your knowledge on risk, return, and the trade-off between them in investments. Learn about the relationship between potential returns and levels of uncertainty or risk associated with different types of investments.
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