Final answer:
The three basic short-term investment strategies are speculation, which focuses on quick profits and high risk; hedging, which aims to manage risk by taking offsetting positions; and diversification, intending to reduce risk by investing across different asset classes.
Step-by-step explanation:
The three basic short-term investment strategies include:
- Speculation: This is an approach where the investor tries to make quick profits by betting on the price movements of financial assets in the short term, which is quite risky.
- Hedging: This strategy involves taking an offsetting position in a related asset to limit potential losses. Examples include options and futures contracts.
- Diversification: This is the practice of spreading investments across various financial assets to reduce risk. It's based on the principle that not all markets will move in the same direction in response to the same event.
Different investment strategies come with varying levels of risk and potential returns. For instance, bank accounts are considered very low risk with correspondingly low returns, whereas stocks are seen as riskier but offer the potential for higher returns. The expected value of an investment is a crucial concept, representing the average return considering the probabilities of various outcomes, which helps investors balance the tradeoff between risk and reward.