CASE – 1: (Based on Ch-1: Investing Setting) –
Soon after your graduation, you would be all set for your career path. As you have studied and learnt several investment and portfolio related theories and concepts, you would be interested to start investing and creating portfolio right from the beginning phase of your career. Before you start doing so, it would be ideal to recap those important concepts and theories. You may want to write down those in brief especially covering the following:
(a) How do you think about your required rate of return? What affects the required rate of return? What would be your perspective on risk?
(b) Suppose you learn about two good investment options and you would like to evaluate both of them. You will have AED 10,000 available for making the investment. The GLuck investment is expected to generate a return of 15.5% with a standard deviation of 8.2% while the SLuck investment is expected to generate a return of 9.8% with a standard deviation of 5.3%. Given a small saving of AED 10,000, you would be interested to invest in only one option. Which one would you choose and why?
The required rate of return is the minimum return an investor expects to achieve by investing in a project.
Factors affecting the required rate include interest rates, risk, market returns and the overall economy.
The risk-return relationship. Generally, the higher the potential return of an investment, the higher the risk. There is no guarantee that you will actually get a higher return by accepting more risk. Diversification enables you to reduce the risk of your portfolio without sacrificing potential returns.
Since Gluck Investment coefficient of variation is lower than Slick Investment . We must choose Gluck Investment.
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