EM 4112-Invest and Portfolio Management

MIDTERM EXAMINATION

NAME: Tresha Kaye B. Octora __________________

YEAR AND SECTION: _4-B______________________

Instruction: write only the correct answer on each questions. Failure to comply with the
simple instruction, your examination paper will be considered null and void.

Identification and Essay

1.)
Different types of investments are available in the market today, each with its own
advantages and disadvantages. Here are some of the most common types of investments:

1. Cash: Cash investments include savings accounts, money market accounts, and
certificates of deposit (CDs).
Advantages of cash investments include low risk, easy access to funds, and FDIC
insurance.
Disadvantages include low returns and the effects of inflation.

2. Stocks: Stocks represent ownership in a company and can provide high returns over
time.
Advantages of stocks include potential for high returns, diversification, and liquidity.
Disadvantages include high risk, volatility, and the possibility of losing money.

3. Bonds: Bonds are debt securities that pay interest to investors.

Advantages of bonds include lower risk than stocks, fixed income, and diversification.
Disadvantages include lower returns than stocks and the effects of inflation.

4. Mutual funds: Mutual funds are investment vehicles that pool money from multiple
investors to purchase a diversified portfolio of stocks, bonds, or other securities.
Advantages of mutual funds include professional management, diversification, and
convenience.
Disadvantages include high fees, tax inefficiency, and the possibility of management
abuses.

5. Exchange-traded funds (ETFs): ETFs are similar to mutual funds but trade like
stocks on an exchange.
Advantages of ETFs include diversification, low fees, and tax efficiency.
Disadvantages include the possibility of management abuses and poor trade execution.

6. Real estate: Real estate investments include owning rental properties, real estate
investment trusts (REITs), and real estate crowdfunding.
Advantages of real estate investments include potential for high returns, diversification,
and inflation protection. Disadvantages include high transaction costs, illiquidity, and the
possibility of market fluctuations.
 7. Alternative investments: Alternative investments include commodities, hedge
funds, private equity, and cryptocurrencies. Advantages of alternative investments
include potential for high returns and diversification.
Disadvantages include high risk, complexity, and lack of regulation.

8. Peer-to-Peer Lending: Peer-to-peer (P2P) lending is a relatively new concept in the

world of finance that connects borrowers and lenders directly, without the need for
intermediaries like banks and financial institutions.
Advantages of P2P lending include lower interest rates than traditional lenders,
diversification, and accessibility to more people.
Disadvantages include the risk of default, lack of regulation, and potential fraud.

9. Collectibles: Collectibles are items that are valued for their rarity, historical
significance, or aesthetic appeal, such as art, antiques, coins, stamps, and wine.
Advantages of collectibles include potential for high returns, diversification, and
enjoyment of ownership.
Disadvantages include illiquidity, high transaction costs, and the possibility of market
fluctuations.

2.)
Ana has $100,000 to invest. She's looking to understand how stocks, bonds, and real
estate can differ and the advantages of each:

Stocks: Ana decides to allocate $40,000 to invest in stocks. She purchases shares of
several well-established tech companies. Over the course of a year, her stock portfolio
increases by 20%. The advantage of investing in stocks is the potential for high returns,
which, in this case, would earn her $8,000 in capital gains. However, stocks also come
with higher volatility and risk.

Bonds: Ana decides to invest $30,000 in bonds. She buys government bonds, which
offer a fixed annual interest rate of 4%. This means she'll receive $1,200 in interest
income each year. The advantage of bonds is stability and regular income, which is
$1,200 annually in this case. However, the returns are lower compared to stocks.

Real Estate: Ana allocates the remaining $30,000 to real estate. She purchases a rental
property for this amount. The property generates $2,500 per month in rental income,
which amounts to $30,000 annually. Additionally, the property appreciates in value by
5% over the year, adding $1,500 in capital gains. The advantage of real estate is the
combination of rental income and potential property value appreciation, making it a
hedge against inflation.

To conclude, Stocks offer the potential for higher returns but come with higher risk. In
this scenario, Ana earned a significant capital gain of $8,000. Bonds provide stability and
a regular income stream. Ana received $1,200 in interest income, making it a safe
choice, especially for risk-averse investors. Real Estate offers both rental income and
potential property value appreciation. In this case, Ana earned $30,000 in rental income
and an additional $1,500 from property value appreciation. Ana's diversified investment
portfolio helps her balance risk and return. She has experienced the benefits of each
asset class, catering to her financial goals and risk tolerance.
3.)
1. Cash (Savings Accounts, Certificates of Deposit - CDs):
Opening an Account: Open a savings account or purchase a CD from a bank or financial
institution.
Deposit Funds: Deposit your money into the account.
Earning Interest: Earn interest on your deposit, typically at a fixed or variable rate.

2. Stocks:
Brokerage Account: Open a brokerage account to buy and sell stocks.
Research: Conduct research on individual stocks or stock funds (e.g., mutual funds or
ETFs).
Purchase: Place buy orders for stocks through your brokerage account.
Monitoring: Continuously monitor the performance of your stock investments.

3. Bonds:
Selection: Choose from government, corporate, or municipal bonds.
Purchase: Buy bonds through a brokerage, directly from issuers, or in the secondary
market.
Holding: Hold the bonds until maturity, receiving periodic interest payments.
Secondary Market: If needed, trade bonds in the secondary market before maturity.

4. Mutual Funds:
Selection: Research and select mutual funds based on your investment objectives.
Open an Account: Open an account with a mutual fund company or a brokerage that
offers mutual funds.
Investment: Invest in the mutual fund by purchasing shares.
Professional Management: Experienced fund managers make investment decisions on
your behalf.

5. Real Estate:
Property Selection: Identify and purchase real estate properties, such as residential,
commercial, or rental properties.
Financing: Use personal funds, mortgages, or loans to finance property acquisition.
Management: Manage the property, including tenant relations, maintenance, and
financial matters.
Income Generation: Generate rental income and possibly benefit from property
appreciation.

6. Exchange-Traded Funds (ETFs):

Selection: Choose ETFs based on your investment goals and risk tolerance.
Brokerage Account: Open a brokerage account to buy and sell ETF shares.
Investment: Invest in ETFs by purchasing shares on the stock exchange.
Diversification: ETFs provide instant diversification by tracking a specific index or asset
class.

7. Alternative Investments (e.g., Hedge Funds, Private Equity):

Accredited Investor Status: For some alternatives, you may need to qualify as an
accredited investor.
Fund Selection: Choose from various alternative investment funds.
Investment: Invest in the fund or partnership, often with a significant minimum
investment.
 Professional Management: Fund managers or general partners make investment
decisions.

8. Peer-to-Peer Lending:
Lending Platform: Join a peer-to-peer lending platform that matches lenders with
borrowers.
Selection: Select loans or borrowers based on your risk tolerance and investment
amount.
Lending: Invest by lending money to borrowers, typically in small increments across
multiple loans.
Receiving Repayments: Receive repayments, including principal and interest, as
borrowers repay their loans.

9. Collectibles (e.g., Art, Antiques):

Selection: Acquire collectible items, such as artwork, antiques, or rare items.
Purchase: Buy collectibles from auctions, galleries, dealers, or private sellers.
Storage and Preservation: Properly store and maintain collectibles to preserve their
value.
Selling: If desired, sell collectibles in the art market, auctions, or through dealers.

4.)
Investing in a diversified portfolio during a weak economy is generally a wise
decision. Diversification involves spreading investments across different asset classes,
such as stocks, bonds, real estate, and more, to manage risk. In a weak economy, there
are several reasons why diversification can be advantageous. First, during an economic
downturn, financial markets can be highly unpredictable. Diversification can help reduce
the impact of market volatility on an investment portfolio. For instance, while stocks may
face declines, bonds and other assets might remain more stable, providing a buffer
against losses. Second, different asset classes respond differently to economic
conditions. Bonds tend to perform better when interest rates fall, while stocks may
recover more robustly during economic upswings. By holding a mix of these assets,
investors are positioned to benefit as economic conditions evolve.
Additionally, the stability of bonds and the consistent income from assets like real
estate can provide financial security in a weak economy, balancing out the potential
losses in equities. Real estate, particularly rental properties, continues to generate rental
income even during economic downturns. The relationship between economic stability
and investment growth is cyclical. As the economy recovers, consumer and business
spending increase, leading to higher corporate profits and potentially driving stock
market growth. Moreover, central bank policies, such as changes in interest rates,
influence the cost of borrowing and returns on bonds.
Lastly, while economic instability can present challenges, diversified investments
allow for risk mitigation and the potential to capitalize on various asset classes as
economic conditions improve. The interplay between economic activity and investment
growth is intricate, with numerous variables influencing the investment process.
Diversification stands as a robust strategy for navigating these economic cycles and
pursuing long-term financial objectives.

5.)
"EM 4112 - Investment and Portfolio Management" is a course focused on equipping
students with the knowledge and skills needed to make informed investment decisions and
effectively manage investment portfolios. It covers a wide array of investment types,
including stocks, bonds, real estate, mutual funds, and alternative investments, and more
providing a thorough understanding of their advantages and disadvantages.
Diversification is a key theme, emphasizing the importance of spreading investments
across different asset classes to mitigate risk. The course also explores the intricate
relationship between economic stability and investment growth, highlighting how economic
factors like interest rates, inflation, and government policies influence investment
performance.
Furthermore, the subject delves into the investment process, from selection and
purchase to monitoring and decision-making, demonstrating how this process varies for
different asset classes. Overall, "EM 4112 - Investment and Portfolio Management" equips
me as a student with the tools to construct diversified portfolios, navigate the complexities
of financial markets, and make sound investment choices to achieve my financial objectives.