commerce 25

Risk and Return Notes

1. Key Concepts

• Risk = the chance of losing money or earning less than expected.

• Return = the profit or gain from an investment, usually expressed as a percentage.

• General principle: Higher potential return = Higher risk.

2. Types of Risk

• Market Risk – prices go up and down due to economic or political events.

• Business Risk – company profits may fall (poor management, competition).

• Liquidity Risk – difficulty selling the investment quickly without loss.

• Interest Rate Risk – changes in interest rates affect returns (esp. bonds).

• Inflation Risk – rising prices reduce the real value of returns.

• Credit Risk – risk that a borrower/company cannot pay back money owed.

3. Types of Return

• capital gains - profits from selling an asset at a higher price (Buying shares that go up in value provide a capital gain. Selling shares before they go down in value can also deliver income if an investor then buys them back at a lower price. You can make a capital gain whether you're buying or selling shares.)

• Dividends – the company pays part of its profit to shareholders. (Owning shares allows you to benefit from the company's profits, which can be given to you as dividends (your share of the profit based on how many shares you own) or as extra shares.)

• Interest Income – earned from lending money (e.g., bonds, savings).

• Total Return = Capital Gains + Income (dividends/interest).

4. Risk–Return Relationship

No matter what investment a person may choose, there will be risks to consider, but not all risks are created equal. Understanding the risk levels that come with different asset classes is key to helping a person decide what products are best suited for your current risk appetite and aspirations.

• Low risk = low return (e.g., bank savings account, government bonds).

• Medium risk = medium return (e.g., managed funds - (A managed fund is made up of a pool of money that comes from many people who have similar investment goals. A professional fund manager invests this money in assets such as shares or property. A managed fund allows a small investor to be involved in the share market and real estate), corporate bonds). 

• High risk = high return (e.g., shares, property, cryptocurrency).

• Speculative/high-risk investments can produce very high gains but also large losses.

5. Diversification

• Strategy of spreading money across different investments (shares, bonds, property, cash).

• Reduces risk because poor performance in one area may be balanced by gains in another.

• "Don’t put all your eggs in one basket."

6. Risk Profiles (Investor Types)

• Conservative Investor – prefers safety and steady returns.

• Balanced Investor – mixes safe and growth investments.

• Aggressive Investor – willing to accept high risk for high potential rewards.

Task 3 Preparation

• Investment: Using money to generate profit (e.g., shares, property, bonds).

• Risk: Chance of financial loss.

• Return: Profit or gain expressed as a percentage.

• Risk–Return Principle: Higher potential return = Higher risk.

• Diversification: Spreading money across different asset types to reduce risk.

• Growth Assets: High risk, high return (shares, property).

• Defensive Assets: Low risk, low return (bonds, term deposits).

• Dividend: Company profit shared with shareholders.

• Superannuation: Long-term investment for retirement, tax-advantaged.

• Managed Fund: Pool of money invested across multiple assets.

• Rate of Return Formula:

  

  Then divide by the number of years

Source A – Investment Returns Table

• Property: High fluctuations (e.g., +13% in Year 2, –10% in Year 3). → High risk.

• Overseas Shares: Very volatile (e.g., +12% then –18%). → Very high risk.

• Australian Shares: Medium volatility (+11%, –8%). → Moderate–high risk.

• Government Bonds: Stable (2–3%). → Low risk, low return.

• Bank Term Deposits: Safe, small return (3–5%). → Low risk.

Key idea: Growth assets (shares, property) can produce both large gains and losses, while defensive assets (bonds, deposits) are steady but with lower returns.

Source B – Five Portfolios

• Albert → Mostly Bank Deposits. Low risk, low return. Conservative investor.

• Manuel → Heavy in Australian Shares, some Bank Deposits. Medium-high risk. Balanced but growth-focused.

• Sally → Large portion Overseas Shares + mix of others. High risk. Aggressive investor.

• Rosa → Heavy Property, with small spread across others. Medium risk but less diversified.

• Minh → Mix of Property, Overseas Shares, Australian Shares, Bonds, Deposits. Diversified. Medium risk.

Compare and contrast risk levels by checking balance between growth vs defensive assets.

Extended Response Focus

You will need to:

1. Refer directly to Source A (investment returns) and Source B (portfolios).

2. Show understanding of risk and return for each type of investment.

3. Discuss diversification and why it matters.

4. Justify which portfolio is most suitable for different investor profiles (e.g., young person, pre-retiree).

5. Use terminology (risk, return, diversification, defensive/growth assets).

Sample points to include in an extended response:

• “As shown in Source A, overseas shares had a return of +12% in Year 1 but –18% in Year 2, showing they are high risk, high return investments.”

• “Albert’s portfolio is dominated by bank term deposits, meaning he has a low-risk strategy suited to someone close to retirement.”

• “Sally’s portfolio contains a high percentage of overseas shares, making her portfolio high risk but potentially high return, suitable for a younger investor with a long time horizon.”

• “Minh’s portfolio is diversified across property, shares, bonds, and deposits, reducing risk by balancing volatile and stable investments.”

Investment Portfolio/Asset Portfolios (Growth vs Defensive)

Investment Portfolios

An investment portfolio is a collection of assets, such as shares and bonds, cash, real estate, or even cryptocurrency, owned by one person or entity. Diversifying a portfolio aims to balance any losses in one investment against gains in others. It can also be known as a collection of financial investments. There are many different financial products available to investors, and they may choose to invest in more than one. It is important to diversify investments by creating this portfolio. Your portfolio will depend on your risk tolerance.

Growth Assets

Definition: Investments designed to grow wealth over time. They usually provide higher returns but are more volatile in the short term (values can rise or fall quickly).

• Purpose: Long-term wealth creation, beating inflation.

• Risk Level: Higher risk.

• Examples:

  • Shares (Overseas & Australian) → returns come from dividends + capital gains, but prices fluctuate due to company performance and market conditions.

  • Property → can increase in value significantly but is subject to housing market cycles and economic conditions.

Positives

• They generate income through capital gains (asset value increasing).

• Best suited for younger investors who have time to recover from downturns.

Negatives

• They are initially high risk, meaning that as prices fluctuate, it could result in loss

Defensive Assets

Definition: Investments designed to protect wealth and provide stable, reliable income. Returns are lower but more predictable.

• Purpose: Security, capital preservation, steady income.

• Risk Level: Lower risk.

• Examples:

  • Government Bonds → fixed interest paid regularly, safe because governments rarely default.

  • Bank Term Deposits → guaranteed returns at a fixed rate, little to no risk of losing money.

Positives

• They focus on income and stability instead of capital growth.

• Best suited for older investors or retirees who want to minimise risk.

Negatives

• As they mainly focus on income and stability, it takes longer to build up money

Portfolios

A portfolio is a mix of growth and defensive assets. The balance determines the risk profile:

• Aggressive Portfolio (High Growth) → 80–100% in growth assets (shares, property).

• Balanced Portfolio (Mix) → roughly 60% growth, 40% defensive.

• Conservative Portfolio (Defensive) → 70–100% in defensive assets (bonds, deposits).

Why Mix Both?

• Growth = long-term wealth.

• Defensive = safety and income.

• A diversified portfolio smooths out returns (if one asset drops, others may stay stable or rise).

Influences on Investment Decisions

People’s influences on their investment choices are characterised by two categories: Personal factors, which are Individual life events that change their money needs, and economic factors, which are the Conditions of the economy that affect investment performance

Law in Action

What Is a Crime?

A crime is an act or omission that breaks a law and is harmful to society.
If behaviour is criminal, the State (police + courts) steps in.

Criminal vs Civil Law — Comparison

Elements of a Crime

Most crimes require two elements:

• Actus Reus — the act of committing the crime

• Mens Rea — the intention / guilty mind

Example:
If someone hits another person with the intention to hurt them → both elements exist → crime.

If it was purely accidental → mens rea might be missing → maybe not a crime.

Age of Criminal Responsibility

• Under 10 → cannot be charged with a crime.

• Age 10–14 → can only be found guilty if the prosecution can prove the child understood their actions were seriously wrong.

• 14 and above → full criminal responsibility (still treated differently to adults, especially in sentencing).

Burden + Standard of Proof

• Burden of proof = who must prove the case → the prosecution.

• Standard of proof = how convincing the evidence must be → criminal cases require proof beyond reasonable doubt.

Meaning: the court must be almost certain the accused committed the crime before finding them guilty.

Police Powers

Police have special legal powers to investigate crime. Powers include:

• stop and question people who they reasonably suspect are involved in crime

• search people, vehicles, and property in certain situations (with or without a warrant)

• arrest a person if they reasonably suspect a crime has been or will be committed

• seize evidence during searches

Police powers are not unlimited — they are controlled by laws to protect individuals.

Your Rights When Dealing with Police

If Police Stop You:

• you must provide your name and address

• you do not have to answer other questions
  (right to silence)

If Police Want to Search You:

• police usually need a reasonable suspicion

• in some cases they need a warrant (signed by a court)

• you can ask “What is your reason for searching me?”

If Police Want to Arrest You:

• they must have a reasonable belief you committed a crime

• they must tell you:

  • you are being arrested

  • why you are being arrested

You must go with police if you are arrested.

Police Questioning

When police question someone:

• you have the right to remain silent
  (except for basic identification details)

• you can say “I want to speak to a lawyer.”

• you do not have to make a statement

Rights: Adults vs Young People

Police must take extra steps to protect young people when interviewing them because young people are considered more vulnerable.

The Court Hierarchy (simplified)

Why we have a hierarchy:

• allows appeals (reviewing decisions)

• each court specialises in the seriousness of matters

Legal Personnel / Roles in Court

Why juries are important

• reflect community values

• protect citizens from government power

• ensure the verdict is based on evidence, not emotion

Civil vs Criminal (quick compare)

Purposes of Punishment

Punishment in criminal law is not just about revenge — it serves several purposes:

1. Retribution – making the offender “pay” for their crime.

2. Deterrence – discouraging the offender and others from committing crimes.

   • General deterrence: warns the community.

   • Specific deterrence: discourages the individual offender.

3. Rehabilitation – help the offender change behaviour and rejoin society.

4. Protection of society – keeping dangerous offenders away from the public.

5. Denunciation – society expresses its disapproval of the crime.

Types of Punishment (Sanctions)

Factors Affecting Sentencing

Aggravating Factors (make sentence harsher)

• Prior convictions

• Crime committed in front of children

• Violence or use of weapons

• Victim was vulnerable

Mitigating Factors (make sentence lighter)

• First offence

• Remorse shown

• Cooperation with police

• Young age or special circumstances

Young People and Sentencing

• Children and adolescents are treated differently:

  • More focus on rehabilitation than punishment

  • Good behaviour bonds and community orders are common

  • Court may consider age, maturity, and family background

Impact of Punishment

• Deterrence: prevents crime if penalties are known

• Rehabilitation: reduces likelihood of reoffending

• Protection: removes dangerous individuals temporarily

• Justice for victims: sense that wrongdoing is addressed

What is ADR?

Alternative Dispute Resolution (ADR) is any method of resolving disputes without going to court.
It is often quicker, cheaper, and less formal than traditional court processes.

Common forms include:

• Mediation – an impartial third party helps both sides negotiate a solution. The mediator cannot impose a decision.

• Conciliation – like mediation, but the conciliator can suggest solutions.

• Arbitration – a third party (arbitrator or judge) listens and makes a binding decision that both sides must follow.

• Community Conferencing – used for young offenders; involves the child, victim, support people, and youth officers to agree on a plan.

Comparison Table: ADR Methods

Why ADR is Effective

• Reduces stress compared to court trials

• Cost-effective – usually cheaper than court

• Faster outcomes

• Encourages cooperation and understanding between parties

• Can be more flexible and culturally appropriate, e.g., in Aboriginal and Torres Strait Islander communities

Limitations of ADR

• Not legally binding in all cases (except arbitration or agreed community conference plans)

• Requires willingness of both parties

• May not work for very serious crimes or highly adversarial disputes

ADR in Aboriginal and Torres Strait Islander Communities

• Often uses customary law practices

• Emphasis on restoring relationships and community harmony rather than punishment

• Elders or community leaders guide discussions and outcomes

What is a Contract?

A contract is a legally binding agreement between two or more parties. It creates rights and obligations that the law will enforce.

Key Elements of a Contract

1. Offer – one party proposes terms.

2. Acceptance – the other party agrees to those terms.

3. Consideration – something of value is exchanged (money, goods, or services).

4. Capacity – parties must be able to understand the contract and its consequences.

5. Intention – parties must intend for the contract to be legally binding.

6. Legality – purpose of the contract must be lawful.

Terms to Know

• Deceptive and Misleading Conduct – providing false information to persuade someone to enter a contract.

• Guarantor – a person who agrees to pay another person’s debt if they cannot or will not pay themselves.

Contracts and Young People

• Legal Capacity: Legal capacity is a person's ability to make their own legal decisions and enter into binding agreements. It requires an individual to understand the facts of a situation, the potential consequences of their choices, and to be able to communicate their decision. Adults are presumed to have legal capacity unless proven otherwise, and capacity is specific to a given decision and can fluctuate

• Minors (under 18) have limited legal capacity:

  • Can enter everyday contracts (e.g., buying food, clothing)

  • Cannot enter complex or high-risk contracts (e.g., loans, mortgages) without parental consent

• If a minor enters a contract they cannot fully understand, it may be voidable (they can cancel it).

Breach of Contract

• If a party fails to meet obligations, the other party can:

  • Seek compensation/damages

  • Demand specific performance (forcing them to comply)

  • Cancel the contract

Examples of Contract Situations

• Buying a car → everyday contract, minor may need parent consent

• Taking a loan → requires adult capacity or guarantor

• Employment agreements → young people can usually agree, but hours/pay must comply with law

Consent

• Consent must be voluntary and informed

• Cannot be given if a person is:

  • Forced, threatened, or misled

  • Incapable due to age, illness, or intoxication

Importance of Contracts

• Protects both parties legally

• Ensures obligations are clear

• Provides a mechanism for legal remedies if agreements are broken

What Are Human Rights?

• Definition (Australian Human Rights Commission): Basic rights and freedoms that belong to all individuals, regardless of race, nationality, gender, or other status.

• Purpose: Protect people from unfair treatment, promote equality, and ensure dignity and safety.

Examples of Human Rights Laws in Australia

• Australian Human Rights Commission Act 1986 – protects human rights and investigates complaints

• Racial Discrimination Act 1975 (Cth) – prohibits racial discrimination

• Sex Discrimination Act 1984 (Cth) – prohibits discrimination based on sex, pregnancy, marital status, or sexual orientation

International Treaties Australia Upholds

1. Convention on the Rights of the Child (CRC) – protects children’s rights

2. International Covenant on Civil and Political Rights (ICCPR) – protects freedom of speech, religion, and fair trial

3. Convention on the Elimination of All Forms of Discrimination Against Women (CEDAW) – protects women’s rights

Bill/Charter of Rights

• Definition: Legal document outlining fundamental rights and freedoms of individuals

• Other nations with Bills/Charters: USA, UK, Canada, New Zealand

• Arguments for in Australia:

  • Protects citizens from government overreach

  • Ensures equality and safety

• Arguments against:

  • Could limit Parliament’s law-making powers

  • Existing laws already provide some protections

Discrimination

Occurs when a person or group is treated unfairly based on characteristics such as race, gender, age, disability, or religion.

• Forms:

  • Direct: explicit unfair treatment

  • Indirect: policies or practices that disadvantage certain groups

Role of Law Enforcement & Agencies

• NSW Police, AFP, ABF, ACIC, ACSC, ASIO – enforce laws, investigate crimes, protect citizens, maintain public safety

• Australian Human Rights Commission (AHRC) – investigates complaints, promotes equality, and educates the public

Protecting Children

• Convention on the Rights of the Child (CRC):

  • Protects from abuse, exploitation, and neglect

  • Guarantees education, health, and safety

• Special legal provisions for youth:

  • Juvenile courts

  • Good behaviour bonds

  • Community conferencing

Comparisons

Human Rights and Technology

• Cyberbullying: criminal and civil responses exist

• Laws aim to protect victims, punish offenders, and educate the community