Page 135 - CAPE Financial Services Syllabus Macmillan_Neat

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FINANCIAL SERVICES STUDIES
UNIT 1 - PAPER 02

KEY AND MARK SCHEME

4. (a) Factors which influence the demand for an asset:
Factors:

(i) Wealth
(ii) Expected rate of return
(iii) Risk and
(iv) Liquidity

1 mark for each correct response up to a maximum of 4 marks.

(b) The influence of each factor on the demand for an asset:

Wealth is the total resources owned by an investor (1 mark). The more
wealth an investor possesses; the more resources he/she will have
available to acquire assets (1 mark). It therefore means that the
demand for an asset is likely to increase when there is an increase
in wealth (1 mark); and shift the demand curve to the right from AD1
to AD2 (1 mark) (Figure 1).

P

AD1 AD2

A

Expected return, i.e. the gains an investor is likely to enjoy from
holding an asset relative to other assets (1 mark). When the expected
return of an asset improves it would make the acquisition of the asset
more desirable (1 mark). It therefore follows that an increase in an
asset’s expected return relative to that of an alternative asset,
holding everything else unchanged, would raise the quantity demanded
on the asset (1 mark). The impact of an improvement in the expected
return of an asset may be reflected by an outward shift in the demand
curve from AD1 to AD2 (1 mark) (Figure 2).

P

AD1 AD2
A