Investment and Rate
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 with return. Even T-bills which is backed by the government also has low risk and it is impossible to earn RM1million with no risk at all.
4. You are bullish on Telekom stock. The current market price is RM50 per share, and you have RM5,000 of your own to invest. You borrow an additional RM5,000 from your broker at an interest rate of 8% per year and invest RM10,000 in the
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 with return. Even T-bills which is backed by the government also has low risk and it is impossible to earn RM1million with no risk at all.
4. You are bullish on Telekom stock. The current market price is RM50 per share, and you have RM5,000 of your own to invest. You borrow an additional RM5,000 from your broker at an interest rate of 8% per year and invest RM10,000 in the