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1.3 The risk and return from conventional assets


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Before we look into more advanced securities called derivatives because their value can be derived from others, it is useful to review some of the conventional assets held in a portfolio.

* Bank savings account.
Investors who want keep the possibility to quickly withdraw a limited amount of cash usually make a deposit in a bank savings account (for example, check UBS, Handelsbanken, Deutsche Bank). Depending on the total amount invested and the seasonal variations in the interest rates, deposits are rewarded with 0-2% interest excluding fees and taxes. The bank will of course invest the money further for its own profit, but tough regulations ensure that the risk of a bank defaulting on savings account is tiny and the governments often protect deposits to an upper limit around EUR 50,000.

* Bank certificates of deposit.
Investors willing to lock up their money for a couple of years until a certificate of deposit reaches the maturity date can expect larger returns around 3-5% (for example, check UBS). For this first type of longer term investment, it becomes important to distinguish the simply compounded annual percentage rate (APR) from the discretely compounded annual percentage yield (APY) that includes the interest on interest rates.