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Which of the following factors could negatively impact the price of an index?
Explanation
An index’s price is derived from all the companies that make up its constituents. All the factors above have the potential to negatively affect the individual share price of its constituents and thus drive down the overall index’s value.
Which of the following statements is true about building your investment strategy:
Explanation
Your strategy has to be in line with your goals and unique life and financialcircumstances. While you can employ a financial strategist to help you with this, it’s not a strict requirement and you can draft your own strategy. Plus, your strategy will likely need to be adapted to the changing economic climate.
Having a strategy in place will guarantee that you reach your goal in your preferred timeframe.
Explanation
Your investments could fall in value, even if you’ve done your due diligence and chosen investments that seemed promising at the time. Having a strategy only helps you stay disciplined and keeps record of your journey.
You want to invest £10,000 once-off into ABC plc and hold your investment for the next five years. Your goal is to achieve 15% growth each year. While doing your research, you find that ABC plc has grown by 7.5% on average over the past five years. What could you do?
Explanation
All of these actions are appropriate. You could also find an investment with your desired level of annual growth, but this could potentially have a higher risk.
You’ve invested in a FTSE 100-tracking ETF, an investment you intended on holding for the next five years. However, the market has been steadily declining for the past six months. What do you do?
Explanation
Remember, sometimes a market’s downturn is temporary. By first looking at the FTSE 100’s performance in the last five years, you’ll be able to make an informed decision instead of selling or changing your strategy immediately.
You bought shares earlier this year in a global retail company that’s been growing and has performed well for the last decade. A global pandemic strikes, and you sell your stake, worried that it won’t be able to trade as freely and thus lose money. You later find that the company has several pharmaceutical branches that remained open to serve people’s healthcare needs. What’s your opportunity cost?
Explanation
While the company’s retail function might suffer, its pharmaceutical branch may experience a rise in profits and mitigate those losses. Plus, if it had a good history before this, it may bounce back once the pandemic is over. This means you lost your chance to increase your holding during the temporary price decrease and you’d lose out on any future profits it might make.
Which of the following is an example of a diversified portfolio?
Explanation
Airlines depend on good oil supply, and cars are manufactured using steel. If one or the other experience a downturn, they could affect each other’s profits. On the other hand, government bonds and global equities returns don’t have a strong, positive correlation. Spreading your investments across multiple stocks helps improve diversification.
Which of the following is not an example of a diversified portfolio?
Explanation
Refer to the answer in question seven.
Which of the following are benefits of having an investment strategy?
Explanation
B and C are correct, but your strategy won’t accelerate your investments’ progress. While it can improve the outcome, the markets can move against you at any time – whether or not you’re prepared for it.
You have to save money for your investment capital because you can only finance your portfolio once-off.
Explanation
You can add funds to your portfolio as many times as you’d like.
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