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Which of the following is an advantage of investing in your home market:
Explanation
Investing locally benefits you because you’ll possibly have earlier access to breaking news that could affect your investment than you would with an overseas holding.
Which of the following is an advantage of investing overseas:
Explanation
Investing offshore helps with diversification because your money isn’t tied up in one market.
ABC plc and XYZ ltd are competitor laptop brands with an almost equal share of the market, rate of production and they generally have the same level of annual returns. In an effort to grow their business, ABC plc hires 500 more employees across the globe to increase output. A global pandemic strikes, forcing several people to work from home and thus increasing demand for laptops. All else equal, which company would be the better investment?
Explanation
ABC plc is better prepared to deal with the increased demand
and will likely make more money during this period and possibly beyond.
Fundamental analysis relies solely on charts, graphs and price data to form conclusions about an asset.
Explanation
Fundamental analysis takes a holistic look at an asset using all the publicly available information, such as the financials of a company, to form conclusions about its future performance.
Company X, a newly listed tech company, has experienced high levels of volatility since its initial public offering. John decides to try and profit from these price fluctuations. To get started, he looks at the company’s price chart for patterns before putting his money up. This is an example of:
Explanation
Technical analysis involves looking at an asset’s price data for clues on how it’ll move next. Fundamental analysis would need in-depth analysis of the company before any conclusions are drawn.
You can diversify your portfolio by:
Explanation
All of these actions can help diversify your portfolio.
A second-tier portfolio is used for long-term investments.
Explanation
You’d generally use a second-tier portfolio for short-to-medium term investments. The aim is to capitalise on shorter-term price momentum rather than long-term growth.
Inflation rose by 4% in the last year. If your portfolio grew by 8% to £500,000 in the same period, what’s the maximum amount you can withdraw without hurting your wealth?
Explanation
You can withdraw 4% of your funds without making too big an impact on your portfolio. 4% of £500,000 is £20,000.
Why is it sometimes good to sell holdings that are performing very well?
Explanation
If the asset that’s overperforming changes the amount of risk in your portfolio, you may want to sell parts of it to bring it back to a desirable level. This is called rebalancing.
Your drawdown rate should always be at the same level as inflation.
Explanation
You ideally want your drawdown rate to be any amount above the rate of inflation, ie % of growth - inflation = ideal drawdown percentage. That way, the growth rate of your portfolio is at least on par with inflation.
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