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CHAPTER 1
1 The concepts of risk, reward, supply and demand underlie the complexity of
financial instruments. How could we use these concepts, for example, to explain
the rate of return expected by a shareholder in Telstra and the price at which
Telstra shares change hands on the stock market? (LO 1.1)
• The rate of the return that the shareholder expects is a function of risk.
Giving due regard to the perceived risk of investing in Telstra, the haggling
of the market arrives at a price that reflects a rate of return commensurate
with the risk involved.
• If the perceived risk of investing in Telstra was to increase, the rate of
return would increase and the share price would fall. The opposite could be
expected if perceived risk declined.
• Assessment of risk and the myriad other factors that shape investors’ buy
and sell decisions are reflected in the supply and demand that is observed
on the market. If demand outweighs supply, the price will increase and vice
versa. At the close of business each day, with all trades completed, the
