Certified Pennsylvania Evaluator Practice Exam

What should investors consider when evaluating an investment opportunity?

1. The amount of capital invested

2. Only the return of capital, not the interest earned

3. A return of the investment and a return on the investment based on risk vs. reward

4. Future market trends and predictions

The correct answer is: A return of the investment and a return on the investment based on risk vs. reward

Investors should focus on the return of the investment and the return on the investment based on risk versus reward because this principle encapsulates the core of sound investment decision-making. It emphasizes the dual aspects of capital allocation: ensuring that the initial investment can be recovered (return of investment) while also assessing the potential gains relative to the risks involved (return on investment). This approach allows investors to evaluate whether the expected returns justify the risks they are agreeing to undertake. Understanding risk versus reward is essential in investment evaluation since higher potential returns often come with increased risks. Consequently, an informed investor analyzes various opportunities by considering both the safer options that provide lower returns and the riskier ones that offer the chance for higher rewards. This comprehensive assessment helps in making strategic investment choices that align with an investor's financial goals and risk tolerance. While capital invested, interest earned, and market predictions are important factors, they do not fully encompass the essential criteria for assessing an investment opportunity. Focus on returns, both of and on the investment, is critical for establishing whether an opportunity is worth pursuing.