Investment Exercise Question

In: Business and Management

Submitted By Tern
Words 1799
Pages 8
GSM 5421 – Investment Analysis

Dr. Chen Chaw Min

Assignment 1 (12 questions)

1. Suppose you discover a treasure chest of RM10 billion in cash

a. Is this a real or financial asset?

Answer:

Yes. 10 billion cash is the financial asset. This is because financial assets only obtain its monetary value from a contractual agreement of what it represents. In contrast, real asset itself has the physical value.

b. Is society any richer for the discovery?

Answer:

No. This is because the cash does not contribute to the productive capacity of the economy.

c. Are you wealthier?

Answer:

Yes. You would become wealthier with RM10 billion cash.

d. Is anyone worst off as a result of the discovery?

Answer:

Yes. The society as a whole is worse off. This is because cash is the financial asset and it becomes is a liability of the government upon the time you found the cash. So, the taxpayers will have to make up for the government liability.

2. The average rate of return on investment in large stocks has outpaced that on investments in T-Bills by about 8% since 1926 in US. Why, then, does anyone invest in T-Bills?

Answer:

This is because T-bill is regarded as an almost risk free asset as it is backed by the government. Therefore, it has lowest volatility as compared to stocks. This is also a reason that people tend to invest in T-bills instead of stocks.

3. You see an advertisement for a book that claims to show how you can make RM1 million with no risk and with no money down. Will you buy the book? Why?

Answer:

No. It is impossible to make RM1million with no risk and with no money down. This is because only a person who takes risk would be compensated…...

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