Tutorial Answer
INVESTMENT & PORTFOLIO MANAGEMENT
FIN3IPM
TUTORIAL ANSWERS
TUTORIAL 1: INTRODUCTION
CHAPTER 1: QUESTION 1
a The process of investment concerns the purchase of assets which will provide a future return to allow for future consumption or further investment. Individuals have to make choices between current and future consumption and because their pattern of income does not always match their pattern of consumption, they are required to make investments. Throughout an individual’s life, an amount of wealth is required to maintain variable levels of consumption. The level of wealth also varies over time. At any point in time, the current level of desired consumption may exceed the current level of wealth. In these circumstances, the individual must obtain additional resources from another to satisfy their consumption needs. That is, the individual must borrow. However, at other points in time, the current level of desired consumption may fall below the current level of wealth. In these circumstances, the individual will save their excess wealth. Typically, this excess wealth is used to purchase an asset, which will yield a future return of wealth, which involves investment.
b The assets into which savings are put represent investment assets. These assets may be financial assets such as shares, bonds or bills or physical assets such as real estate, motor vehicles or art collections. Intangible assets such as human capital are also sometimes referred to as an investment asset.
c The rate of return between future consumption and current consumption is known as the pure rate of interest.
d Given that an investment represents a delay in current consumption, an investor requires a return to compensate for the lost consumption opportunity. This return is required to induce an individual to forgo money (and consumption) now and defer the money (and consumption) to a future date. This return reflects the time value of money.
e In times of
FIN3IPM
TUTORIAL ANSWERS
TUTORIAL 1: INTRODUCTION
CHAPTER 1: QUESTION 1
a The process of investment concerns the purchase of assets which will provide a future return to allow for future consumption or further investment. Individuals have to make choices between current and future consumption and because their pattern of income does not always match their pattern of consumption, they are required to make investments. Throughout an individual’s life, an amount of wealth is required to maintain variable levels of consumption. The level of wealth also varies over time. At any point in time, the current level of desired consumption may exceed the current level of wealth. In these circumstances, the individual must obtain additional resources from another to satisfy their consumption needs. That is, the individual must borrow. However, at other points in time, the current level of desired consumption may fall below the current level of wealth. In these circumstances, the individual will save their excess wealth. Typically, this excess wealth is used to purchase an asset, which will yield a future return of wealth, which involves investment.
b The assets into which savings are put represent investment assets. These assets may be financial assets such as shares, bonds or bills or physical assets such as real estate, motor vehicles or art collections. Intangible assets such as human capital are also sometimes referred to as an investment asset.
c The rate of return between future consumption and current consumption is known as the pure rate of interest.
d Given that an investment represents a delay in current consumption, an investor requires a return to compensate for the lost consumption opportunity. This return is required to induce an individual to forgo money (and consumption) now and defer the money (and consumption) to a future date. This return reflects the time value of money.
e In times of