FIN2603 - FINANCE: INVESTMENT VERIFIED ANSWERS AND
QUESTIONS - MOST RECENT EDITION 2026/2027
Q1: What is an investment?
ANSWER An investment is the commitment of current funds or resources to
generate future returns or income. It involves sacrificing present consumption
for the expectation of greater future benefit.
Q2: What is the difference between real assets and financial assets?
ANSWER Real assets are tangible assets such as property, machinery, and
commodities that generate productive capacity. Financial assets are claims on
real assets or the income they generate, such as stocks and bonds.
Q3: What is the primary goal of investment?
ANSWER The primary goal of investment is to increase wealth over time by
generating returns that compensate for risk, inflation, and the time value of
money.
Q4: What is the role of financial markets in investment?
ANSWER Financial markets facilitate the allocation of capital by connecting
savers (investors) with borrowers (businesses and governments), enabling
price discovery, providing liquidity, and reducing transaction costs.
Q5: What is the difference between saving and investing?
ANSWER Saving involves setting aside current income in low-risk, liquid
instruments (e.g., savings accounts). Investing involves deploying funds into
higher-risk instruments (e.g., stocks, bonds) with the expectation of higher
returns over time.
Q6: What is the risk-return tradeoff?
ANSWER The risk-return tradeoff is the principle that higher expected
returns are associated with higher levels of risk. Investors demand a risk
premium to compensate for taking on additional uncertainty.
Q7: Define the term 'portfolio' in the context of investments.
ANSWER A portfolio is a collection of financial assets (stocks, bonds, cash
equivalents, etc.) held by an investor. Portfolios are constructed to achieve
diversification and optimize the balance between risk and return.
,Q8: What are the main types of financial investments?
ANSWER The main types are: (1) equity securities (stocks), (2) fixed-income
securities (bonds), (3) derivatives (options, futures), (4) money market
instruments, and (5) real estate investment trusts (REITs).
Q9: What is meant by the 'time value of money' in investments?
ANSWER The time value of money is the concept that a rand received today
is worth more than a rand received in the future, because money available
now can be invested to earn a return. It underpins discounted cash flow
analysis.
Q10: What is a direct investment versus an indirect investment?
ANSWER A direct investment involves buying securities or assets outright
(e.g., purchasing shares directly). An indirect investment involves investing
through an intermediary such as a mutual fund or unit trust.
CHAPTER 2: The Investment Environment
Q11: What are the key components of the investment environment?
ANSWER The key components are: financial markets (money and capital
markets), financial intermediaries (banks, insurance companies, fund
managers), regulatory bodies, and the instruments traded (stocks, bonds,
derivatives).
Q12: What is the difference between money markets and capital
markets?
ANSWER Money markets deal in short-term debt instruments with maturities
of one year or less (e.g., Treasury bills). Capital markets deal in long-term
instruments such as stocks and bonds with maturities exceeding one year.
Q13: What are primary markets and secondary markets?
ANSWER Primary markets are where new securities are issued and sold for
the first time (e.g., IPOs). Secondary markets are where existing securities are
traded between investors (e.g., the JSE stock exchange).
Q14: What is an Initial Public Offering (IPO)?
ANSWER An IPO is the first time a company offers its shares to the public
on a stock exchange. It allows the company to raise capital from public
investors and provides liquidity for existing shareholders.
Q15: What role do financial intermediaries play?
, ANSWER Financial intermediaries such as banks, unit trusts, and insurance
companies pool funds from savers, reduce transaction costs, diversify risk,
and channel capital to borrowers and investment opportunities.
Q16: What is the Johannesburg Stock Exchange (JSE)?
ANSWER The JSE is South Africa's primary securities exchange, providing a
regulated marketplace for trading equities, bonds, derivatives, and other
financial instruments. It plays a central role in capital formation in South Africa.
Q17: What is a broker and what role does a broker play?
ANSWER A broker is an intermediary who executes buy and sell orders on
behalf of investors in exchange for a commission or fee. Brokers provide
market access and investment advice.
Q18: What is the difference between a bull market and a bear market?
ANSWER A bull market is characterized by rising asset prices and investor
optimism. A bear market is characterized by falling prices (generally a decline
of 20% or more) and widespread pessimism.
Q19: What is market liquidity?
ANSWER Market liquidity refers to the ease and speed with which assets
can be bought or sold at stable prices without significantly impacting those
prices. Highly liquid markets have many buyers and sellers.
Q20: What are over-the-counter (OTC) markets?
ANSWER OTC markets are decentralized markets where trading occurs
directly between two parties without a formal exchange. OTC markets are
common for bonds, derivatives, and smaller company shares.
CHAPTER 3: Risk and Return
Q21: How is the expected return of an investment calculated?
ANSWER The expected return is calculated as the weighted average of all
possible returns, where the weights are the probabilities of each outcome:
E(R) = Σ [P(i) × R(i)].
Q22: What is standard deviation in the context of investment risk?
ANSWER Standard deviation measures the dispersion of returns around the
expected return. A higher standard deviation indicates greater variability and
therefore higher risk.
Q23: What is variance in investment analysis?
, ANSWER Variance is the average of the squared deviations from the mean
return. It measures the spread of returns and is the square of the standard
deviation.
Q24: What is the coefficient of variation (CV)?
ANSWER The coefficient of variation is the ratio of the standard deviation to
the expected return (CV = σ / E(R)). It measures risk per unit of return and is
useful for comparing investments with different expected returns.
Q25: Explain the concept of systematic risk.
ANSWER Systematic risk (market risk) is risk that affects all investments in
the market and cannot be diversified away. Examples include interest rate
changes, inflation, and recessions.
Q26: Explain the concept of unsystematic risk.
ANSWER Unsystematic risk (specific or idiosyncratic risk) is risk unique to a
particular company or industry. It can be reduced through diversification, as it
affects only specific firms.
Q27: What is beta in portfolio analysis?
ANSWER Beta measures the sensitivity of a security's return to movements
in the market return. A beta of 1 means the asset moves in line with the
market. Beta > 1 indicates higher volatility; beta < 1 indicates lower volatility.
Q28: What is the capital asset pricing model (CAPM)?
ANSWER The CAPM describes the relationship between systematic risk and
expected return: E(R) = Rf + β(E(Rm) – Rf), where Rf is the risk-free rate, β is
beta, and E(Rm) is the expected market return.
Q29: What is the risk-free rate?
ANSWER The risk-free rate is the theoretical return on an investment with
zero risk, typically represented by the yield on short-term government
securities such as Treasury bills.
Q30: What is a risk premium?
ANSWER A risk premium is the additional return that investors require over
the risk-free rate for bearing the uncertainty of an investment. It compensates
investors for taking on systematic risk.
Q31: What does 'diversification' mean in investments?
ANSWER Diversification is the strategy of spreading investments across
different assets, sectors, or geographic regions to reduce unsystematic risk.
QUESTIONS - MOST RECENT EDITION 2026/2027
Q1: What is an investment?
ANSWER An investment is the commitment of current funds or resources to
generate future returns or income. It involves sacrificing present consumption
for the expectation of greater future benefit.
Q2: What is the difference between real assets and financial assets?
ANSWER Real assets are tangible assets such as property, machinery, and
commodities that generate productive capacity. Financial assets are claims on
real assets or the income they generate, such as stocks and bonds.
Q3: What is the primary goal of investment?
ANSWER The primary goal of investment is to increase wealth over time by
generating returns that compensate for risk, inflation, and the time value of
money.
Q4: What is the role of financial markets in investment?
ANSWER Financial markets facilitate the allocation of capital by connecting
savers (investors) with borrowers (businesses and governments), enabling
price discovery, providing liquidity, and reducing transaction costs.
Q5: What is the difference between saving and investing?
ANSWER Saving involves setting aside current income in low-risk, liquid
instruments (e.g., savings accounts). Investing involves deploying funds into
higher-risk instruments (e.g., stocks, bonds) with the expectation of higher
returns over time.
Q6: What is the risk-return tradeoff?
ANSWER The risk-return tradeoff is the principle that higher expected
returns are associated with higher levels of risk. Investors demand a risk
premium to compensate for taking on additional uncertainty.
Q7: Define the term 'portfolio' in the context of investments.
ANSWER A portfolio is a collection of financial assets (stocks, bonds, cash
equivalents, etc.) held by an investor. Portfolios are constructed to achieve
diversification and optimize the balance between risk and return.
,Q8: What are the main types of financial investments?
ANSWER The main types are: (1) equity securities (stocks), (2) fixed-income
securities (bonds), (3) derivatives (options, futures), (4) money market
instruments, and (5) real estate investment trusts (REITs).
Q9: What is meant by the 'time value of money' in investments?
ANSWER The time value of money is the concept that a rand received today
is worth more than a rand received in the future, because money available
now can be invested to earn a return. It underpins discounted cash flow
analysis.
Q10: What is a direct investment versus an indirect investment?
ANSWER A direct investment involves buying securities or assets outright
(e.g., purchasing shares directly). An indirect investment involves investing
through an intermediary such as a mutual fund or unit trust.
CHAPTER 2: The Investment Environment
Q11: What are the key components of the investment environment?
ANSWER The key components are: financial markets (money and capital
markets), financial intermediaries (banks, insurance companies, fund
managers), regulatory bodies, and the instruments traded (stocks, bonds,
derivatives).
Q12: What is the difference between money markets and capital
markets?
ANSWER Money markets deal in short-term debt instruments with maturities
of one year or less (e.g., Treasury bills). Capital markets deal in long-term
instruments such as stocks and bonds with maturities exceeding one year.
Q13: What are primary markets and secondary markets?
ANSWER Primary markets are where new securities are issued and sold for
the first time (e.g., IPOs). Secondary markets are where existing securities are
traded between investors (e.g., the JSE stock exchange).
Q14: What is an Initial Public Offering (IPO)?
ANSWER An IPO is the first time a company offers its shares to the public
on a stock exchange. It allows the company to raise capital from public
investors and provides liquidity for existing shareholders.
Q15: What role do financial intermediaries play?
, ANSWER Financial intermediaries such as banks, unit trusts, and insurance
companies pool funds from savers, reduce transaction costs, diversify risk,
and channel capital to borrowers and investment opportunities.
Q16: What is the Johannesburg Stock Exchange (JSE)?
ANSWER The JSE is South Africa's primary securities exchange, providing a
regulated marketplace for trading equities, bonds, derivatives, and other
financial instruments. It plays a central role in capital formation in South Africa.
Q17: What is a broker and what role does a broker play?
ANSWER A broker is an intermediary who executes buy and sell orders on
behalf of investors in exchange for a commission or fee. Brokers provide
market access and investment advice.
Q18: What is the difference between a bull market and a bear market?
ANSWER A bull market is characterized by rising asset prices and investor
optimism. A bear market is characterized by falling prices (generally a decline
of 20% or more) and widespread pessimism.
Q19: What is market liquidity?
ANSWER Market liquidity refers to the ease and speed with which assets
can be bought or sold at stable prices without significantly impacting those
prices. Highly liquid markets have many buyers and sellers.
Q20: What are over-the-counter (OTC) markets?
ANSWER OTC markets are decentralized markets where trading occurs
directly between two parties without a formal exchange. OTC markets are
common for bonds, derivatives, and smaller company shares.
CHAPTER 3: Risk and Return
Q21: How is the expected return of an investment calculated?
ANSWER The expected return is calculated as the weighted average of all
possible returns, where the weights are the probabilities of each outcome:
E(R) = Σ [P(i) × R(i)].
Q22: What is standard deviation in the context of investment risk?
ANSWER Standard deviation measures the dispersion of returns around the
expected return. A higher standard deviation indicates greater variability and
therefore higher risk.
Q23: What is variance in investment analysis?
, ANSWER Variance is the average of the squared deviations from the mean
return. It measures the spread of returns and is the square of the standard
deviation.
Q24: What is the coefficient of variation (CV)?
ANSWER The coefficient of variation is the ratio of the standard deviation to
the expected return (CV = σ / E(R)). It measures risk per unit of return and is
useful for comparing investments with different expected returns.
Q25: Explain the concept of systematic risk.
ANSWER Systematic risk (market risk) is risk that affects all investments in
the market and cannot be diversified away. Examples include interest rate
changes, inflation, and recessions.
Q26: Explain the concept of unsystematic risk.
ANSWER Unsystematic risk (specific or idiosyncratic risk) is risk unique to a
particular company or industry. It can be reduced through diversification, as it
affects only specific firms.
Q27: What is beta in portfolio analysis?
ANSWER Beta measures the sensitivity of a security's return to movements
in the market return. A beta of 1 means the asset moves in line with the
market. Beta > 1 indicates higher volatility; beta < 1 indicates lower volatility.
Q28: What is the capital asset pricing model (CAPM)?
ANSWER The CAPM describes the relationship between systematic risk and
expected return: E(R) = Rf + β(E(Rm) – Rf), where Rf is the risk-free rate, β is
beta, and E(Rm) is the expected market return.
Q29: What is the risk-free rate?
ANSWER The risk-free rate is the theoretical return on an investment with
zero risk, typically represented by the yield on short-term government
securities such as Treasury bills.
Q30: What is a risk premium?
ANSWER A risk premium is the additional return that investors require over
the risk-free rate for bearing the uncertainty of an investment. It compensates
investors for taking on systematic risk.
Q31: What does 'diversification' mean in investments?
ANSWER Diversification is the strategy of spreading investments across
different assets, sectors, or geographic regions to reduce unsystematic risk.
