Investment Assignment

1. - Investment is a science and art of using resources in economic activities to make profit in the future. - The overall purpose for investing is to make money or to improve our welfare, which for our purposes can be defined as monetary wealth, both current and future. 2. Risk of investment is an uncertainty of return. 3. “Risk drives expected returns” true because the specification of a larger range of possible returns from an investment reflects the investor’s uncertainty regarding what the actual amount will be. Therefore, a large range of expected returns make the investment riskier. 4. Fixed income refers to any type of investment that yields a regular (or fixed) return. For example, if you lend money to a borrower and the borrower has to pay interest once a month, you have been issued a fixed-income security when a company does this, it is often called a bond or corporate bank debt (although “preferred stock” is also sometimes considered to be fixed income). Sometime people misspeak when they talk about fixed income. Bonds actually have higher risk, while notes and bills have less risk because these are issued by government agencies. 5. Distinguish between a financial asset and a real asset: - Real assets: are used to produced goods and services such as land, buildings, machines, etc… - Financial assets: define the allocation of income or wealth among investors. Financial assets contribute to productive capacity of the economy indirectly, because they allow for separation of the ownership and management of the firm and facilitate the transfer of funds to enterprise with attractive investment opportunities. (Financial assets such as stock, bond, etc…) 6. - Institutional investors: an organization which pool large sums of money and invest those sums in companies. They include banks, insurance companies, retirement or pension funds, hedge funds and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment. Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can engage in active role in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management. Page 1

- Institutional investors have more money and access to company managements. So they can buy early and sell early. Individual investors usually buy only after the institutions have jacked up the price. Then they are left holding high priced stocks when the institutions move out. 7. - Discuss the importance of the financial markets to the Cambodia Economy such as in 2009, Cambodia will establish its stock market although it is a limited stock market. With the introduction of a financial market, it will help this economy to mobilize the Cambodian people’s savings and channel them into long-term investments in private, social, economic and infrastructure projects. This new emerging will take Cambodian to the world of investing. - Primary markets can not exist without secondary market because the secondary market involves the trading of securities initially sold in primary market, it provides liquidity to the individuals who acquired these securities. Primary markets would not function well without secondary markets. Savers would be reluctant to invest in new securities if they had to hold these securities to maturity or incur large search costs in funding a seller when they were ready to sell. In summary, secondary markets are indispensable to the proper functioning of the primary markets. The primary markets, in turn, are indispensable to the proper functioning of the economy. 8. The intrinsic value of stock is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value. For call options, this is the difference between the underlying stock's price and the strike price. For put options, it is the difference between the strike price and the underlying stock's price. In the case of both puts and calls, if the respective difference value is negative, the intrinsic value is given as zero. 9. - Direct investing is an investment which is sufficiently large to affect a company's subsequent decisions. This is sometimes a majority ownership, but sometimes it's just a significant minority ownership. - Indirect investing is a way of investing in real estate without actually investing in the property. Indirect investment can be done in many ways, including securities, funds, or private equity. Most investors interested in indirect investment would do so through a company or advisor who has experience in this type of investing. 10. The relationship between bond prices and bond yields: The general definition of yield is the return an investor will receive by holding a bond to maturity. So if you want to know what your bond investment will earn, you should know how to calculate yield. Required yield, on the other hand, is the yield or return a bond must offer in order for it to be worthwhile for the investor. The required yield of a bond is usually the yield offered by other plain vanilla bonds that are currently offered in the market and have similar credit quality and maturity. 11. If risky asset has an expected return of 7 percent while a safe asset has an expected return of 8 percent: it’s mean that investors should choose the safe asset to invest for their business Page 2

without thinking because it’s make an expected return 8 percents higher than risky asset 7 percents. 12. Most investors hold diversified portfolios: in abstract, this study examines the diversification decisions of more than 60,000 individual investors during a six year period (199196) in recent U.S. capital market history. The majority of investors in our sample are underdiversified and the extent of under-diversification is more severe in retirement accounts. Investors' personal characteristics, their stock preferences, and their behavioral biases jointly influence their diversification choices. Younger, lower-income (less wealthy), and relatively less sophisticated investors and those who follow price trends, prefer local (familiar) stocks, and exhibit over-confidence hold relatively less diversified portfolios. Under-diversified investors exhibit strong style and industry preferences and they also prefer more volatile and positively skewed stocks. Furthermore, we find some evidence to support the asymmetric information hypothesis for under diversification. In contrast, we find that factors such as small portfolio size, transaction costs, and search costs are unlikely determinants of investors' diversification choices. The unexpectedly high idiosyncratic risk in investors' portfolios results in a welfare loss. 13. Bond should the investors select: - Corporate bond, bond price=28%, Yield= 8% Tax exempt income Taxable income bond = 1- Tax rate Tax exempt income= 0.28*0.08= 0.0224 0.0224 Taxable income bond =

= 0.0243 = 2.43% 1- 0.08

- Municipal bond, bond price= 28%, Yield= 5.5% Taxable income bond = 0.28*0.055 = 0.0154 = 1.54% •

Investors should choose corporate bond because it’s provide the higher interests.

Page 3

14. + Security selection decision: choosing the particular stocks or bonds or other investment instruments to include in a portfolio. + An active and a passive investment manager differ in the asset allocation decision are: - Active managers believe the market can be beaten. While they can’t beat it all the time, many active managers do believe there are certain irregularities in the market that can be taken in to consideration to achieve potentially higher returns. - Passive managers generally believe that it is difficult to beat the market. Therefore, they essentially offer asset class performance that closely matches an index for those investors who are unwilling to assume the risks of active management.

Page 4