Topic 2 Flashcards
(5 cards)
Which statement is correct?
a) Present value is the amount that must be set aside today in order to have a specified amount in the future.
(b) An ordinary annuity has identical payments or receipts each and every period for a specified time frame
(c) The more frequently interest is compounded, the larger will be the future value of any deposit
(d) All of the above
D
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Investments with a high standard deviation represent high risk and therefore should be avoided. Discuss.
Whilst the statement that a higher standard deviation represents greater risk is true, the higher risk is also likely to be associated with greater returns. The risk that an investor will accept would depend on a number of factors including:
-risk profile
-whether the investment is short term / long term
-need for access to liquidity
-whether there are any dependants
gross income / saving capacity
Explain the principle of correlation and how it can be used to select assets within a portfolio.
The principle of correlation is a measure of the way in which the returns of two investments move in relation to each other. Positive correlation would exist if the returns of the two assets tend to move in the same direction, whereas negative correlation would be where the returns would move in opposite directions.
To achieve effective diversification, assets should be selected on the basis of exhibiting returns that move in opposite directions to each other.
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