topic 4

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Describe the term ‘trade off’ in relation to the risk/reward relationship?
Higher risk is associated with greater probability of higher return and lower risk with a greater probability of smaller return. This trade off which an investor faces between risk and return while considering investment decisions is called the rrto
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Why do premium bonds carry no risk?
They are 100% backed by the government
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How does diversification associated with unit trusts spread risk?
Spreading your money across a number of companies and assets can reduce the risk if any one investment does not do as well as expected.
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Shares in an established company provide no diversification. Explain how this could be risky?
Shares in an established company carry risk as there is no diversification. But there is reasonable chance of divit ends.
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Explain a benefit and drawback of buying shares in a new innovative company which has just begun selling shares on the stock market (newly quoted or floated)?
Share in a newly quoted company carry a higher risk as the company is unknown but, if it is in an innovative sector the return could be high.
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Explain how the return from a savings account (normal notice account, cash ISA or savings bond) differs from the return expected from an investment?
Someone who save in a normal savings account earns a stated rate of interest that may be set in advance or may vary with changes. The interest is an award they earn on the savings.
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Why have interest rates in the UK have been kept low by the Bank of England since 2009?
They have kept it low to make it easier for people to borrow and for the economy to come out of its low level of activity.
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Why are financial regulators concerned about low interest rates for small savers?
Financial regulators are concerned about this because risky investment products aren't suitable for many small savers and they may lose their money.
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Why keep interest rates low as a result of Brexit uncertainty?
The reduction in 2016 was also related to uncertainty after the brexit decision. Bank rate was increased back to 0.50% back in 2017.
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Why is the interest rate charged on a mortgage cheaper than the rate quoted on a personal loan?
When people borrow money the interest rate they pay reflects the risk to the lender. Other things being equal, the rate changed on a mortgage, which is a secured loan, is cheaper than the rate quoted on a personal loan which is unsecured.
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Why do individuals who pose a greater credit risk have to pay higher interest?
Mortgage interest rates vary with the amount of risks the lender. So an individual who poses a greater credit risk to the bank will have to pay a higher interest rate for this reason.
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Where will people who are risk averse invest their money?
They might invest in a collective scheme such as a unit trust, purchase high risk investments such as shares in a new company.
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Why does a risk averse person take out insurance?
So that they are covered financially.
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How would you describe someone who’s only debt is their mortgage?
Risk averse
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Other cards in this set

Card 2

Front

Why do premium bonds carry no risk?

Back

They are 100% backed by the government

Card 3

Front

How does diversification associated with unit trusts spread risk?

Back

Preview of the front of card 3

Card 4

Front

Shares in an established company provide no diversification. Explain how this could be risky?

Back

Preview of the front of card 4

Card 5

Front

Explain a benefit and drawback of buying shares in a new innovative company which has just begun selling shares on the stock market (newly quoted or floated)?

Back

Preview of the front of card 5
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