QUESTION FIVE INVESTMENTS An investment is defined as the cu

QUESTION FIVE: INVESTMENTS An investment is defined as the current commitment of funds to one or more assets that will be held over some future time period and are concerned with management of investors\' wealth, which are the sum of current income and the present value of all future income. Required a. Discuss the basic rules that underpin investment programmes that will help investors reduce financial risk Distinguish between financial assets and real assets (4 marks) (2 marks) (4 marks) c. Outline the characteristics of investments d. The excerpts below describe activities of either an investment, saving, speculation or gambling. Carefully read the excerpts and determine what activity they describe. The rationale for your answers should be clearly stated i. Mapalo intends to undertake a project of constructing 10 housing units in five years\' time. To assist him achieve this mammoth project, he has decided to place his $100,000 in a corporate bond that has just been issued by one top tier company. The coupon rate of the bond is 10%, inflation rate is at 9.9% and interest rates are at 9.5%. (2 marks) i. Kamocha is an experienced fellow who has over a long period of time developed the art of predicting the correct scores of football matches. For the 2015/16 Barclays Premier League, he predicted that Leicester City Football Club would be the champions of England and true to his prediction, Leicester City were crowned champions on 7 May 2016. He reaped a total GBP170,000 out of the prediction. (2 marks) li Bbuli decided to invest a total K200,000 in equity for Chilanga Cement PLC. The undertaking was for a period of 36 months. Prices were relatively stable in the environment with a marginal upward trend. After that period he expects some returns through capital gains and dividends. (2 marks) iv. Mabvuto has recently come from a peace-keeping mission in the Congo DR and has learnt the pattern of exchange rates in Zambia especially against the US Dollar. He has decided to withhold his massive dollar holdings in the hope that the exchange rate would deteriorate further (2 marks) v. Learned Chongo is an international dealer who deals in commodities on the various stock exchanges across the world. He recently entered into some 10

Solution

Basic rules that underpin investment programmes that will help investor reduce financial risk.

There are many stratergies which people follow to reduce financial risks.

1. Allocation of Assets :- Allocation of assets means weightage of investments in your portfolio. Allocation of assets based on some specific objectives. for instance, if your motive to earn more profit then your investments will be more in stocks that have high risk and will invest less in bonds and other government securities which are comparitively secure.

2. Portfolio diversification:- In portfolio diversification we diverse our investment means we invest in variety of assets, that help to reduce risk. for instance if we invest only in one company or industry then if due to some uncertain reason market hit negatively then we will have to suffer loss. but if we invest in different companies and industries, then we can mitigate our risk at the time of market fall. A portfolio must include variety of stocks.

2.Real Assets includes real estates, infrastructure, commodities, agricultural land, plant & Machineries, metal etc. Most of the business houses hold a range of assets. There are basically three type of assets- 1. Real Assets 2. fiancial assets 3. intangible assets . Real assets like financial asset considered tangible assets .Real assets have intrinsic valye and financial assets values are drived from a contractual claims on an underlying assets that may be a tangible or non tangible asset. for instance commodities and properties are real assets but commodity futures, exchange traded funds and real estate investment trusts constitute fiancial assets whose value depend on the underlying real assets.

3. Characterstics of Investment

a) when we invest in any stock, we first look for the return that stock can give us because our sole motive is to earn returns from the investments therefore return play important role.

b)  while investing in any stock, we first look for return that stock can give and with that we look for risk associated with that return because we all know higher the return, higher the risk and vise versa. Therefore risk and return both play important role while selecting stock to invest.

c) liquidity also matters when while selecting stock to invest we look for the return at the same time we look for the liquidity. Liquidity means how readily investment can be converted into cash. Liquidity means an investment is easily saleable, marketable and easily realisable into money. Majority of the time when the liquidity of the stock is high, return is low.  

d) (I) this is an investment in it organisation is investing money for construction of 10 housing units

(ii) this is an gambling for sure because kamocha having long experience in predicting the correct score of matched. therefore it is an batting.

(iii) this is an true investment as Bbuli investing in equity, therefore we can not say that it is an saving. it is investment because Bbuli investing in company.

(iii) this is an speculation as in this there is a high risk and reward that dollar rate can increase or decrease.

(iv) this is an speculation activity also. all transactions without actual delivery is defined as speculative transaction