Investment Basics Flashcards

What is 'market volatility' in the context of investing?

Answer: The degree to which asset prices fluctuate over a period of time

Market volatility measures how sharply and frequently asset prices rise and fall; high volatility means large, rapid price swings.

What is the 'risk-return tradeoff' principle?

Answer: Investments with greater potential returns typically come with greater risk

The risk-return tradeoff states that to earn higher potential returns, investors must accept a higher level of risk.

What does 'net asset value' (NAV) refer to in a managed fund?

Answer: The per-unit value of a fund, calculated as total assets minus liabilities divided by units outstanding

NAV is the price per unit of a managed fund, determined by dividing the fund's net assets (assets minus liabilities) by the number of units on issue.

What is a 'growth investment' as opposed to a 'defensive investment'?

Answer: An asset expected to increase in value over time and accepting higher short-term risk

Growth investments, such as shares and property, aim to increase in value over time and accept higher short-term price volatility in pursuit of long-term gains.

What does 'benchmark' mean in the context of investment funds?

Answer: A standard index used to measure and compare a fund's performance

A benchmark is a reference index (such as the S&P 500) used to evaluate whether a fund's returns are above or below what the broader market achieved.

What is 'gearing' in an investment context?

Answer: Using borrowed money to increase the size of an investment position

Gearing means using debt to amplify an investment, which can magnify both gains and losses beyond what your own capital alone would produce.

Which of the following is an example of a 'defensive asset'?

Answer: A government bond paying a fixed interest rate

Government bonds are defensive assets because they provide stable, predictable income and are less volatile than growth assets like equities or property.