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Unformatted text preview: © 2011 LexisNexis Australia 1 Financial Planning in Australia 4ed – by Taylor, Juchau, Houterman Solutions by Roger Juchau Chapter 5 INVESTING IN SHARES Solutions to Questions Question 1: Discuss the objectives of investing. The objectives of investing would include: • to create wealth; • to invest in assets with reasonable returns with minimal risk; and • to create a diversified investment portfolio. Investing is generally considered to be where one takes a medium to long-term perspective and expects relatively stable and predictable returns. On the other hand, speculating is usually viewed as the purchase or sale of securities where the returns are much more volatile and less predictable and generally has a short-term perspective. It is seen as a much more risky activity than investing. Question 2 : ‘There are several ways to invest.’ Discuss the investment products you are familiar with and evaluate the merits of each. There are several ways to invest; some might include the following: 1) Short-term vehicles — cash, fixed deposits etc. Limited returns, not a hedge against inflation, in this sense capital not secure. Normally this vehicle preferred by conservative investors. Taxed annually when interest received at marginal rates. 2) Shares Growth investment (through capital growth); dividends (franked at times); more risky than short-term vehicles but higher returns; can be more ta×effective (eg, timing of CGT) 3) Bonds 4) Preference shares 5) Convertible securities 6) Derivative securities 7) Options 8) Futures 9) Managed funds 10) Real estate 11) Tangibles © 2011 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Reproducing or distributing any material from this website for any other purpose requires written permission from the Publisher. © 2010 Reed International Books Australia Pty Limited trading as LexisNexis. Ancillary for Financial Planning in Sustralia 4ed - Taylor, Juchau, Houterman © 2011 LexisNexis Australia 2 Question 3: Discuss the various types of risks that impact on investments. Some of the risks that should be taken into account when making investments are the following nine types. Details in Chapter 5, in section on ‘Risk and Return’. 1) Exchange rate risk 2) Business risk 3) Financial risk 4) Purchasing power risk 5) Interest rate risk 6) Liquidity risk 7) Ta×risk 8) Market risk 9) Event risk Question 4: What is the difference between holding period return and internal rate of return? The holding period return is the total return earned from holding an investment for a specified period of time. The internal rate of return is the compounded annual rate of return earned by a long-term investment....
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