Page 136 - CAPE Financial Services Syllabus Macmillan_Neat

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FINANCIAL SERVICES STUDIES

UNIT 1 - PAPER 02
KEY AND MARK SCHEME

Risk, i.e. the degree of uncertainty associated with the expected
return of an asset relative to alternative assets, also affects the
demand for the asset (1 mark). Based on the theory of asset demand,
if an asset’s risk rises relative to that of alternative assets, its
quantity demanded will decline (1 mark). This may be reflected by a
shift in the demand curve to the left from AD1 to AD2 (2 marks) (see
Figure 3).

P

AD2 AD1

A
Liquidity is the ease and speed at which an asset can be converted
into cash relative to alternative asset (1 mark). The more liquid an
asset is relative to alternative assets, holding everything else
unchanged, the more desirable it is and the greater will be the
quantity demanded (1 mark). It follows therefore that when the
liquidity of an asset improves this would result in an increase in
the demand for the asset; reflected by a shift in the demand curve to
the right (2 marks) (see Figure 4).

P

AD1 AD2

A
For each factor:
1 mark for brief explanation of factor
1 mark for identifying the relationship between factor and asset
demand
1 mark for summarizing the impact of a change in demand caused by
change in each factor
1 mark for showing the impact graphically