CHAPTER 3 FAR
Cards (7)
- Investment Principles:
- Guidelines or rules that investors follow when making decisions about where to allocate their capital
- Help investors manage risk, maximize returns, and achieve their financial goals
- Common Investment Principles include:
- Risk management: identification, analysis, and acceptance or mitigation of uncertainty in investment decisions
- Diversification: spreading investments across different asset classes and within each asset class to reduce overall portfolio risk
- Asset allocation: allocating investments among different asset classes based on risk tolerance, investment goals, and market conditions
- Cost management: minimizing investment costs, including fees, commissions, and taxes to maximize net returns
- Liquidity management: ensuring investments can be easily converted into cash without significant loss of value
- Risk-free rates:
- Certainty that an actual outcome will not differ from the expected outcome
- Serves as a benchmark against which other investment returns are compared
- Typically associated with the return on a short-term government bond issued by a financially stable government
- Investment Environment:
- Refers to factors and conditions influencing investment decisions and outcomes
- Understanding the investment environment is crucial for making informed investment decisions and maximizing returns
- Factors Influencing the Investment Environment:
- Cost of capital
- Duration of investment
- Probability of success/failure
- Regulatory environment
- Macroeconomic outlooks
- Competitive landscapes
- Technological changes
- Fiscal incentives
- Market forecasts
- Cash flow budget
- Risk and Return:
- Analysis of the likelihood of challenges involved in investing while measuring the returns
- High-risk investments give better returns to investors and vice versa
- Two types of risks: security-specific risk (unsystematic risk) and market risk (systematic risk)
- Return is usually presented as a percentage relative to the original investment over a given period
- Investment theories and maxims:
- Accelerator Theory of Investment
- Internal Funds Theory of Investment
- Neoclassical Theory of Investment