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SURNAME :TAYERA
PROGRAMME : ACCOUNTING
YEAR : 2023
LEVEL : 4.2
Investment can be defined as an asset that is developed with the goal of assisting in the long-
term growth of your wealth and securing your future financial needs. The wealth generated
through investment plans can be put to use for a number of goals, including covering income
gaps, saving for retirement, or carrying out certain particular commitments like loan
repayment, paying for children's further education, buying other assets, etc. In Zimbabwe
many people invest in the stock market as a way to build wealth and generate returns , for
instance the Zimbabwe Stock Exchange has seen increased activity in recent years with
investors looking for opportunities to invest in local companies. The ZSE has also introduced
new products such as exchange traded funds (ETFs) .To encourage more diversified
investments. The essay is going to discuss several purposes why people invest.
Wealth Creation
One of the most significant advantages of investing is the generation of wealth. People can
increase their wealth over time by making investments in assets like stocks, bonds, real
estate, or mutual funds, which can provide returns on their initial cash. A higher level of life
can result from investment wealth accumulation. People may afford to live more comfortably
and have access to better healthcare, education, and other services through realizing returns
on their capital investments , ensure the families and individuals' financial security. People
can provide a safety net for themselves and their loved ones in case of unforeseen financial
difficulties by assembling a portfolio of assets that produce returns over time and also
Financial freedom can be attained through wealth generation through investments. People can
construct a passive income stream that can either complement or completely replace earned
income by building a portfolio of assets that produce returns over time. As a result, you may
have more freedom to pursue hobbies and other interests without being restricted by a typical
career.
Innovation
Reduces inflation
Investment plays a crucial role in enhancing the quality of life as it enables people and
corporations to produce wealth, generate employment opportunities, and contribute to the
expansion of the economy. By investing in stocks, real estate, or businesses, people and
companies can yield profits on their investments. These earnings can be utilized to enhance
their financial stability and enrich their living standards by availing themselves of superior
housing, healthcare, education, and other commodities and services. Moreover, investing can
also play a vital role in the expansion of the economy by generating employment
opportunities and promoting the establishment of new enterprises. To illustrate, a financier
who invests in a nascent enterprise can assist the firm in flourishing and generating job
openings for other members of the society. This can result in a surge in economic pursuits,
elevated remunerations, and an overall amelioration in living standards. Additionally,
investing can also stimulate originality and the creation of new technologies and
commodities. This can lead to advancements in healthcare, communication, transportation,
and other domains, which can further augment the quality of life for individuals and
communities.
Funding education
However there are factors and limitations investment has which may include:
Risk
All investments involve some level of uncertainty, and the possibility of loss is always
present. The degree of uncertainty associated with an investment varies depending on several
factors, including market instability, economic circumstances, and the performance of the
investment itself. For instance, investing in equities can be hazardous since the worth of a
company's shares can fluctuate due to factors such as alterations in the economy, changes in
customer demand, or modifications in management. Similarly, investing in property can be
dangerous because property values can fluctuate due to factors such as changes in the local
economy, alterations in population demographics, or changes in interest rates. Investors
should meticulously assess the degree of uncertainty linked to an investment and decide if it
corresponds with their financial objectives and risk acceptance. A few investors might be
inclined to assume increased risks to potentially garner greater yields, whereas others may opt
for less hazardous alternatives that provide more steadiness and foreseeability.
Charges and costs can hinder investment as they have the potential to decrease the total
profits of an investment. When opting for mutual funds, exchange-traded funds (ETFs), or
other managed investment products, investors are usually required to pay charges and costs
imposed by the investment manager or financial institution. The costs and expenditures may
consist of charges for managing, administrating, and other operational costs. Charges and
expenditures can also be imposed during the purchase or sale of assets, like brokerage fees or
transaction charges.
b) Discuss how an individual’s investment strategy may change as he or she
As a person progresses through the stages of accumulation, spending, and gifting phases of of
life, their investment plan ought to adapt accordingly.
The investment approach of a person can vary while progressing through the accumulation
phase of life, which is commonly denoted by a concentration on amassing riches for the
future. In this phase, the individuals might be relatively younger and possess a more extended
investment duration. Consequently, they can embrace more risk in their investment portfolio.
Here are some examples of how an individual's investment strategy may change during the
accumulation stage
Diversification
Although investments focused on growth can provide greater profits, they can also be more
unstable and vulnerable to market changes. To minimize risk, people might opt to broaden
their investment portfolio by investing in various asset categories, such as shares, bonds, and
During the accumulation stage, the primary goal is to generate high returns and accumulate
wealth for the future. To achieve this goal, individuals may choose to invest in growth-
oriented investments such as stocks, mutual funds, and exchange-traded funds (ETFs). These
investments have the potential to generate higher returns over the long-term but also come
with a higher degree of risk.
During the accumulation phase, it's crucial to periodically assess the investment portfolio to
make sure it's in line with the investor's financial objectives and risk tolerance. The
identification of any investments that are underperforming or are no longer in line with the
person's financial objectives can be aided by routine portfolio assessments. This can make
sure the portfolio keeps producing good returns and accruing wealth over time. Frequent
evaluations of one's portfolio can assist in detecting any investments that are not meeting
expectations or are no longer in line with the individual's financial objectives. For instance,
an investment may have been fitting during the accumulation phase but may no longer be
appropriate as the individual moves closer to the spending or gifting stages of life.
Recognizing underperforming investments can aid in eliminating them from the portfolio and
enhancing its overall performance.
On the spending stage ,is a stage when a person enters the spending stage of life, which is
often defined by a focus on generating revenue to cover living expenditures, their investing
approach may change. People who are in this period of life may be nearing retirement or have
already left the workforce. Here are a few instances of how a person's investment approach
could alter during the spending stage which includes
Managing inflation
Inflation can significantly affect the purchasing power of the income from investments during
the consumption stage. Investments in inflation-protected securities, such as Treasury
Inflation-Protected Securities (TIPS), or changing one's asset allocation to include assets that
have historically performed well in inflationary environments, such as commodities or real
estate, are two options for managing inflation risk.
Tax efficiency
During the spending stage, it is important to consider the tax implications of investment
decisions. Individuals may choose to invest in tax-efficient investments such as municipal
bonds, which are exempt from federal taxes and may be exempt from state and local taxes as
well. Tax-efficient investments can help to maximize the income generated from investments
and minimize the impact of taxes on investment returns.
Asset allocation
The investment strategy may shift towards a more conservative asset allocation that is
focused on preserving capital and generating a steady stream of income. This may include a
greater allocation to fixed-income investments and a lower allocation to growth-oriented
investments such as stocks.
Lastly, Gifting Phases of life refer to a moment in a person's financial life cycle where they
may concentrate on transferring wealth to charitable organizations or future generations. The
giving phases can take place during a person's lifetime or after their passing and can be
motivated by a number of things, including a desire to help charitable causes, a desire to
leave a legacy for future generations, or a desire to reduce the tax implications of transferring
wealth. An individual's financial strategy may change to concentrate on tax-efficient
investments, estate planning, charitable giving, and asset allocation during the gifting periods
of life. To maximize the impact of their donations while limiting the impact of taxes, a person
can decide to invest in tax-efficient investments like municipal bonds or use tax-advantaged
accounts like a donor-advised fund. During the giving phases, an individual's investment
strategy may be significantly influenced by estate planning. In order to create a thorough
estate plan that incorporates techniques like trusts or charitable foundations to transfer wealth
to future generations or good causes, the individual may decide to collaborate with an estate
planning attorney and financial advisor. Gifting stages can happen while a person is alive or
after they pass away. Here are some instances of how a person's investment approach could
alter during the gift-giving stages of life.
Charitable giving
During the gifting phases, charitable giving can play a significant role in a person's
investment strategy. To maximize the impact of their donations and minimize the impact of
taxes, people may decide to contribute appreciated assets, such as stocks or real estate, to
charitable organizations. Giving to charities can be a powerful way to pass riches down to the
next generation while simultaneously promoting causes that are in line with the donor's moral
principles.
Regular portfolio assessments can guarantee that the investments remain in line with the
donor's goals and objectives for gifts. Reviews can assist in identifying any assets that may be
highly risky or that are no longer in line with the person's financial objectives. In order to
make sure that the asset allocation stays suitable for the individual's financial circumstances,
regular portfolio evaluations can be helpful.
C) Some financial theorists consider the variance of the distribution of expected rates of
return to be a good measure of uncertainty .Discuss the reasoning behind this measure of risk
and its purpose [5]
Financial theorists believe that the variance of the expected rate of return distribution is a
suitable indicator of uncertainty since it offers a quantitative approach to assess the range of
potential outcomes for an investment. A statistical measure called the variance of expected
returns measures the spread or dispersion of a set of data points around their mean. The
variance of expected returns, when used in the context of finance, gives an indication of the
probable range of investment outcomes given a set of expected returns.
Investors and portfolio managers can use the variance of expected returns as a tool to
evaluate the risk associated with a single investment or a portfolio of investments. Investors
are better able to deploy their resources and control their exposure to risk when they are
aware of the potential range of outcomes linked to a given investment. Additionally, it is
possible to analyze the relative riskiness of various investments using the variance of
predicted returns and to create portfolios that satisfy the desired balance between risk and
return.
To assess the level of uncertainty or potential volatility associated with an investment, the
variance of predicted returns is used as a risk indicator. The investment is riskier since higher
variation suggests a larger range of possible outcomes. In contrast, a lower variance implies a
more constrained range of possible outcomes, which denotes a reduced level of risk
associated with the investment.
2a) i) Payoff diagram of the investment position
Payoff
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________________|/____________\________
$0 $370 $425 $445 stock price
Buying price:
= $157250
Profit/loss = Selling price - Buying price
loss = - $31875
b) Give the examples of how a “snakebite effect” influence the investors behavior.
The snakebite effect describes an investor's reluctance to take a risk after losing money. It's
sometimes thought that this impact has the reverse effect of overconfidence. Following a loss,
the snakebite effect causes people to lose confidence in their investing decisions. For
instance, after some notable market drops, more money typically tends to be liquidated from
mutual funds. The inverse of "buy low, sell high" is this. Here are some of the examples
discussed below
Loss aversion
The snake bite effect can influence investors behavior through loss aversion. Bias may cause
investors to keep losing investments for an excessively long time in the hopes of recovering
their losses or to refrain from investing altogether to reduce the likelihood of suffering a loss.
This conduct may lead to poor investment methods and lost opportunities for profit. Fear,
worry, and regret are some of the feelings that frequently motivate loss aversion. If they sell
an investment at a loss only to see it recover soon after, or if they miss out on a possible gain
because they were too risk-averse, investors could feel remorse. Loss aversion is rooted in the
psychological principle that people experience negative emotions more strongly than positive
emotions. This means that the pain of losing money is felt more acutely than the pleasure of
gaining the same amount of money. As a result, investors tend to be more focused on
avoiding losses than on maximizing gains. Studies have shown that the pain of a loss is about
twice as strong as the pleasure of a gain.
The impact of loss aversion is reflected in investor behavior. For example, investors may be
reluctant to sell declining stocks in hopes of a future recovery. This can lead to a
phenomenon known as the "sunk cost fallacy" in which investors hold on to their losing
investments in the hope that they will recoup their losses, even if recovery is unlikely. .
Another example of loss aversion is the tendency to avoid risk altogether. Investors may be
reluctant to invest in an asset with a higher return potential if the asset carries a high risk of
loss. As a result, the portfolio may become overly conservative and fail to generate the
returns necessary to meet the investor's long-term goals.
Trust issues
Trust is an important factor in investment decisions. Investors need confidence that the
companies they invest in will perform well and generate investment returns. You should also
rely on intermediaries such as brokers and financial advisors to provide investment advice
and conduct business. If an investor has a history of burnout from fraudulent or unethical
investments, they may feel less confident about investment opportunities and be reluctant to
invest in things that do not appear to be true.
Research has shown that trust is closely related to investor confidence, and that low levels of
trust can lead to lower investment activity, lower trading volumes, and increased market
volatility. For example, when markets are turbulent, investors are less likely to invest or sell
their holdings if they are not confident the market will recover.
Companies and financial intermediaries must be open, honest, and responsible if they want to
earn and keep customers' trust. They must exhibit a dedication to moral conduct and legal
compliance, and they must give investors clear, accurate information about their performance
and business operations. Investors can take precautions to safeguard themselves and increase
their confidence in the investment process. To lessen the impact of any single investment or
market event, this involves performing due investigation on potential investments, dealing
with reliable financial advisors and brokers, and diversifying their portfolios.
Confirmation bias
A cognitive bias known as "confirmation bias" describes people's propensity to seek for,
understand, and retain information in a way that supports their preexisting views or
hypotheses while disregarding or discarding information that challenges those beliefs.
In the context of investing, confirmation bias can lead investors to selectively seek out
information that supports their investment decisions, while ignoring information that may
suggest they should reconsider or change their investment strategy. For example, an investor
who has made a large investment in a particular stock may ignore negative news about the
company and focus only on positive news, leading them to continue holding the stock even as
its value declines. Confirmation bias can also lead to overconfidence in investment decisions,
as investors may be more likely to attribute their successes to their own skill and expertise,
while dismissing or downplaying the role of luck or external factors.
Emotional decision making is another example of how the snakebite effect can influence
investor behaviour. After experiencing a significant loss, investors may become emotionally
attached to their investments and make decisions based on fear, panic, or other strong
emotions, rather than rational analysis.
Emotional decision making can lead to impulsive buying or selling decisions that are not
based on sound investment principles. For example, an investor who is fearful of losing more
money may panic and sell all of their investments, even if this goes against their long-term
investment strategy and risks missing out on potential gains.
An investor who has suffered a significant loss in the stock market may become emotionally
attached to a particular stock and refuse to sell it, even if it no longer makes sense from a
financial perspective. This emotional attachment can lead to a phenomenon known as
"anchoring," where investors become fixated on a particular price or outcome and are
unwilling to deviate from that expectation, even in the face of new information.
It can also lead to impulsive buying or selling decisions that are not based on sound
investment principles. For example, an investor who is fearful of losing more money may
panic and sell all of their investments, even if this goes against their long-term investment
strategy and risks missing out on potential gains.
$180625
+ $ 20
180645
= $157250
loss =- $23375