Topic C09: Investment, Risk and Return Student Worksheet Answer p.

BAFS Compulsory Part - Basics of Personal Financial Management

Topic C09: Personal Financial Management - Investment, Risk and Return

Activity 1: Comparing Different

Types of Deposits

Compare different types of deposits based on three criteria:

(i) Safety: Are you sure you can get back all the money deposited?
(ii) Return: How much interest could you get from the deposit?
(iii) Ease of Getting Cash: Is it easy to convert your money into
cash?

Safety Return Ease of Getting

Cash
(A) Under Your The risk of Lowest return Easiest
Mattress losing money (actually no
is the highest. return)
(B) Savings The risk of Moderate Easier than (C)
Account losing money return
is the lowest.
(C) Fixed The risk of Highest return Most difficult
Deposit losing money (interest rate is (have to wait
Account is the lowest. usually higher till maturity)
than that of
savings
account)

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Topic C09: Investment, Risk and Return Student Worksheet Answer p.2

Assignment - Following the Stock

Market

From newspapers or the Internet, record the daily opening, highest,

lowest and closing levels of the Hang Seng Index and a stock of your
choice in the coming week.

Stock price information is widely available in the Internet. One of the

popular websites for checking stock prices is YAHOO! FINANCE
(http://hk.finance.yahoo.com/).

Date Hang Seng Index Stock:

Open High Low Close Open High Low Close

[No standard answers for this part]

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Topic C09: Investment, Risk and Return Student Worksheet Answer p.3

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Topic C09: Investment, Risk and Return Student Worksheet Answer p.4

Activity 2: The Risk and Return Pyramid

Based on the risk (or safety) and return (i.e. reward) factors, assign
the following financial products to different areas of the pyramid.

Risk Return

High High
4

Low Low

Risk and Return Categories:

Category 1: Lowest Risk and Lowest or No Return

Category 2: Low Risk and Low Return
Category 3: Moderate Risk and Moderate Return
Category 4: High Risk and High Return

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Topic C09: Investment, Risk and Return Student Worksheet Answer p.5

Financial Products: Category

1. Cash _____1_______

2. Savings Account _____1_______

3. Fixed Deposit _____1_______

4. Government Bonds _____2_______

5. Corporate Bonds _____3_______

6. Stocks _____4_______

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Topic C09: Investment, Risk and Return Student Worksheet Answer p.6

Activity 3: Case Study

Form groups of four to five.

You are given 5 cases concerning how individuals or families might

use their savings. Each of them has $200,000 to save or invest and
they are given different alternatives. Amongst your group, discuss,
advise and justify your recommendations.

Hints:
Before recommending your investment options, refresh yourselves
with the characteristics of different types of deposits and
investment products discussed earlier and consider the following
factors:
1. Investment objectives
2. Ability to bear risk
3. Ease of converting investment into cash

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Topic C09: Investment, Risk and Return Student Worksheet Answer p.7

Case 1
Andy earns $30,000 a month as an officer in a bank. He is
28 years old and single. He lives with his parents who are
73 and 67 years old. He plans to use the $200,000 for
emergencies and may need to help pay for his parents’
medical expenses.

He has the following three choices:

A. Savings Account
B. 3-year corporate bonds
C. Stocks

Which alternative do you recommend and why?

A. Savings Account
Andy needs the money for emergency. He should look for
the option that offers him low risk and high ease of
converting the investment into cash. In this case, a savings
account meets these objectives.

Note: Other options are acceptable if students can provide

reasonable answers with justification.

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Topic C09: Investment, Risk and Return Student Worksheet Answer p.8

BAFS Learning and Teaching Example

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Topic C09: Investment, Risk and Return Student Worksheet Answer p.9

Case 2

Brenda earns $50,000 a month as an executive of an

advertising agency. She is 46 years old and divorced with
no child. She is interested in investing the $200,000 for her
eventual retirement at the age of 60.

She has the following three choices:

A. 1-year fixed deposit

B. 5-year corporate bonds
C. Stocks

Which alternative do you recommend and why?

C. Stocks
Brenda earns a relatively high income and is investing for
retirement. She would not need the money before her
retirement (14 years later). Hence, she can bear higher risk
for possibly higher return. For this reason, she can put her
money into the stock market to earn return.

Note: Other options are acceptable if students can provide

reasonable answers with justification.

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Topic C09: Investment, Risk and Return Student Worksheet Answer p.10

Case 3

Carol is 30 years old and earns $30,000 as a civil servant.

She is getting married soon and rents an apartment. She
plans to use the $200,000 as part of her down payment on
her new flat in a few years.

She has the following three options:

A. Savings account
B. 3-year Government bonds
C. Stocks

Which alternative do you recommend and why?

B. 3-year Government bonds

Carol would only need the money when she buys an
apartment in a few years, so she does not need quick
access to the cash. However, she wants to secure the
money for buying an apartment. 3-year Government bonds
would be safe enough to help her keep the principal and
yet gives her better return than savings deposit.

Note: Other options are acceptable if students can provide

reasonable answers with justification.

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Topic C09: Investment, Risk and Return S tudent Worksheet Answer p.11

Case 4

David and Eva, both 36 years old, are owners of a trading

firm and are making $150,000 a month from their business.
They are quite well off and have accumulated some wealth.
They want to set aside $200,000 as part of the university
fund for their 6-year old son.

They are facing the following 3 alternatives:

A. 5-year fixed deposit

B. 10-year corporate bonds
C. Stocks

Which alternative do you recommend and why?

C. Stocks
David and Eva are wealthy and young. They can bear
higher risk. Their son will be going to university in 12 years’
time, so they would not need immediate access to this
money. They should consider investing it in the stocks to
gain possibly higher return.

Note: Other options are acceptable if students can provide

reasonable answers with justification.

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Topic C09: Investment, Risk and Return Student Worksheet Answer p.12

Case 5

Frankie is 29 years old and works as an architect with a

monthly income of $40,000. His wife, Gigi, aged 26 with a
part-time job. They are planning to have a baby in 3 years’
time and want to move into a larger apartment. The
$200,000 will be used for these purposes.

They are facing the following 3 alternatives:

A. Savings account
B. 3-year Government bonds
C. Stocks

Which alternative do you recommend and why?

B. 3-year Government bonds

Frankie and Gigi need to secure the money for future use
as they plan to have a baby and move to a larger
apartment. They need the money in 3 years’ time, so the 3-
year Government bonds, although having a lower expected
return than stocks, better suit their objectives.

Note: Other options are acceptable if students can provide

reasonable answers with justification.

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Topic C09: Investment, Risk and Return Student Worksheet Answer p.13

BAFS Learning and Teaching Example

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