Unit study guide · NISM Series XXI-B
Investment Landscape and Required Return
4 questions in this unit
What this unit covers
- Which approach best distinguishes an investment decision from a short-term speculative bet?
- What economic claim does an ordinary equity share give its holder?
- An investment earns 10% while prices rise 5% over the year. What is its exact real return, approximately?
- A security requires a 12% return when the comparable risk-free rate is 7%. What is its risk premium?
Key ideas
From the practice bank · 1
Which approach best distinguishes an investment decision from a short-term speculative bet?
Assessing value and future cash flows provides an investment basis rather than relying only on a hoped-for price move. Both investment and speculation can still involve losses. Remember: A reasoned investment decision links price, value, risk and expected cash flows.
Hint Think about the evidence used before committing money. Common mistake: Assuming that calling a trade an investment removes its risk.
XXI-B-001From the practice bank · 2
What economic claim does an ordinary equity share give its holder?
An ordinary share gives a residual ownership claim after the company’s obligations to other claimants. Its dividends and market value are not guaranteed. Remember: Equity represents ownership rather than a fixed repayment promise.
Hint Think about where owners stand after other claims are met. Common mistake: Treating an ordinary share like an interest-paying loan.
XXI-B-002From the practice bank · 3
An investment earns 10% while prices rise 5% over the year. What is its exact real return, approximately?
The real return is approximately 4.76% because purchasing power grows more slowly than the money value. Real return = (1 + nominal return) ÷ (1 + inflation) − 1. Working: 1.10 ÷ 1.05 − 1 = 0.047619, or 4.76%. Remember: Use growth factors when calculating an exact inflation-adjusted return.
Hint Compare the growth in money with the growth in prices. Common mistake: Using subtraction when the question asks for the exact real return.
XXI-B-003From the practice bank · 4
A security requires a 12% return when the comparable risk-free rate is 7%. What is its risk premium?
The risk premium is 5 percentage points because it is the return required above the risk-free rate. Working: 12% − 7% = 5 percentage points. Remember: A risk premium is additional expected compensation, not a guaranteed extra return.
Hint Separate compensation for taking risk from the baseline return. Common mistake: Confusing total required return with compensation for risk.
XXI-B-004