EXPECTATIONS ABOUT SIZE,

GROWTH, RETURNS AND

RISK
What Is an Investment?

- is the act of putting money to work to start or expand a business or project or

the purchase of an asset, with the goal of earning income or capital appreciation.

- is oriented toward future returns, and thus entails some degree of risk.

- Common forms of investment include financial markets (e.g. stocks and bonds),
credit (e.g. loans or bonds), assets (e.g. commodities or artwork), and real estate.
Investment Models

1. Income Portfolio
2. Growth Investing
3. Speculative Portfolio
Income Portfolio

 focuses on making money from interest payments, dividends, capital

gains collected upon the sale of a security or other assets, and any other
profit made through an investment vehicle of any kind.
 is income that is earned from investments, such as real estate and the stock
market.
 is taxed at a different rate once it is withdrawn as compared to regular
income.
Growth Investing

 is a stock-buying strategy that focuses on companies expected to grow at an

above-average rate compared to their industry or the market.
 growth investors tend to favor small, young companies poised to expand,
expecting to profit by a rise in their stock prices.
Speculative Portfolio

 is one with a high degree of risk where the focus of the purchaser is on
price fluctuations. The investor buys the tradable good (financial
instrument) in an attempt to profit from market value changes.
Speculator - somebody who makes a speculative investment
- doesn’t care about the annual income the asset may bring, such as
dividends or interest payments. What matters is how much he or
she can sell it for at a future date.
What it actually takes to start a venture
1. Evaluate yourself 7. Finance your business.
2. Think of a business idea. 8. Develop your product or service.
3. Do market research. 9. Start building your team.
4. Get feedback. 10. Find a location.
5. Make it official. 11. Start getting some sales.
6. Write your business plan. 12. Grow your business.
 4 Ways to Enter into a Market

1. Head-on Attack
2. Fanking Manoeuvre
3. Narrow Focus and
4. Strategic Alliance.
Head-on attack

 is the traditional frontal attack on an established competitor. It calls for “an

expensive advertising and promotion campaign. It works best for established
brand names and franchises that can leverage existing customer awareness
and a ‘coming to a store near you’ approach.”
Flanking
 is about attacking competitors where they are vulnerable, such as through a
lower price, better service or a neglected market niche
Narrow focus
 consists of entering a market niche that is too small to attract large
competitors, the authors note.
Strategic alliance
 hinges on creating a relationship with other businesses, through joint
venture, licensing arrangement, or some form of cooperation that fulfils the
needs of a target market and takes ‘advantage of the synergies.’
 Risk
• involves exposure to some type of danger and the possibility of loss or
injury.
• refers to the chance an outcome or investment's actual gains will differ from
an expected outcome or return. Risk includes the possibility of losing some
or all of an original investment.
 Types of Financial Risk
1. Business Risk 7. Counterparty Risk
2. Credit or Default Risk
8. Liquidity Risk
3. Country Risk
4. Foreign-Exchange Risk
5. Interest Rate Risk
6. Political Risk
 Business risk
 is concerned with all the other expenses a business must cover to remain
operational and functioning. These expenses include salaries, production
costs, facility rent, office, and administrative expenses. The level of a
company's business risk is influenced by factors such as the cost of goods,
profit margins, competition, and the overall level of demand for the
products or services that it sells.
 Credit risk
 is the risk that a borrower will be unable to pay the contractual interest or
principal on its debt obligations.
 Bonds with a lower chance of default are considered investment grade,
while bonds with higher chances are considered high yield or junk bonds.
 Country risk
 refers to the risk that a country won't be able to honor its financial
commitments.
 applies to stocks, bonds, mutual funds, options, and futures that are issued
within a particular country.
 Foreign exchange risk
• applies to all financial instruments that are in a currency other than the
domestic currency.
 Interest rate risk
• is the risk that an investment's value will change due to a change in the
absolute level of interest rates, the spread between two rates, in the shape of
the yield curve, or in any other interest rate relationship.
• This type of risk affects the value of bonds more directly than stocks and is
a significant risk to all bondholders. As interest rates rise, bond prices in the
secondary market fall – and vice versa.
 Political risk
 is the risk an investment’s returns could suffer because of political instability
or changes in a country.
 This type of risk can stem from a change in government, legislative bodies,
other foreign policy makers, or military control. Also known as geopolitical
risk, the risk becomes more of a factor as an investment’s time horizon gets
longer.
 Counterparty risk
 is the likelihood or probability that one of those involved in a transaction
might default on its contractual obligation.
 can exist in credit, investment, and trading transactions, especially for those
occurring in over-the-counter (OTC) markets. Financial investment products
such as stocks, options, bonds, and derivatives carry counterparty risk.
 Liquidity risk
 is associated with an investor’s ability to transact their investment for cash.
 Typically, investors will require some premium for illiquid assets which
compensates them for holding securities over time that cannot be easily
liquidated.
 Risk vs. Reward
• The risk-return tradeoff is the balance between the desire for the lowest
possible risk and the highest possible returns.