Community Share and Bond Issue - Essay Example

Q1.(a) The historical return for each of the three portfolios are as follows: Historical Return for Portfolios Year to Dec Australian Shares International shares Property Australian Bonds Cash Portfolio Beta Portfolio Kappa Portfolio Omega 1992 -2.30% 5.40% 7.00% 10.50% 6.90% 6.54% 7.63% 1.87% 1993 45.40% 24.60% 30.10% 16.30% 5.40% 27.64% 10.05% 36.10% 1994 -8.70% -7.60% -5.60% -4.70% 5.30% -5.86% 2.21% -7.75% 1995 20.20% 26.50% 12.70% 18.60% 8.00% 8.48% 10.59% 20.59% 1996 14.60% 6.80% 14.50% 11.90% 7.60% 13.48% 9.15% 12.24% 1997 12.20% 41.70% 20.30% 12.20% 5.60% 15.44% 8.39% 22.67% 1998 11.60% 32.60% 18.00% 9.50% 5.10% 13.32% 7.27% 19.18% 1999 16.10% 17.50% -5.00% -1.20% 5.00% 0.74% 2.76% 12.30% 2000 3.60% 2.50% 17.80% 12.00% 6.20% 12.64% 7.36% 6.11% 2001 10.10% -9.40% 14.60% 5.50% 5.30% 10.06% 6.27% 5.15% 2002 -8.10% -26.90% 11.80% 8.80% 4.80% 6.62% 6.30% -9.76% 2003 15.90% 0.00% 8.80% 3.00% 4.90% 7.90% 4.91% 9.71% 2004 27.60% 10.80% 32.00% 7.00% 5.60% 21.12% 24.36% 23.44% 2005 21.10% 17.60% 12.50% 5.80% 5.70% 11.54% 6.40% 18.33% 2006 25.00% 12.30% 34.00% 3.10% 6.00% 19.84% 8.22% 22.99% 2007 18.00% -1.60% -8.40% 3.50% 6.80% 2.84% 4.62% 6.84% 2008 -40.40% -24.90% -54.00% 14.90% 7.60% -23.72% 2.90% -38.47% 2009 39.60% 5.00% 7.90% 1.70% 3.50% 11.76% 3.14% 22.88% 2010 3.20% -0.70% -1.10% 6.00% 4.40% 1.32% 4.17% 1.17% 2011 -10.50% -5.30% -1.50% 11.40% 5.00% 1.86% 5.63% -7.14% Calculation has been shown in the Appendix (b) The expected return and the risk standard deviation of five asset classes and three portfolios are as follows: Expected Return E® and Risk standard Deviation Historical Return for Portfolios Year to Dec Australian Shares International shares Property Australian Bonds Cash Portfolio Beta Portfolio Kappa Portfolio Omega 1992 -2.30% 5.40% 7.00% 10.50% 6.90% 6.54% 7.63% 1.87% 1993 45.40% 24.60% 30.10% 16.30% 5.40% 27.64% 10.05% 36.10% 1994 -8.70% -7.60% -5.60% -4.70% 5.30% -5.86% 2.21% -7.75% 1995 20.20% 26.50% 12.70% 18.60% 8.00% 8.48% 10.59% 20.59% 1996 14.60% 6.80% 14.50% 11.90% 7.60% 13.48% 9.15% 12.24% 1997 12.20% 41.70% 20.30% 12.20% 5.60% 15.44% 8.39% 22.67% 1998 11.60% 32.60% 18.00% 9.50% 5.10% 13.32% 7.27% 19.18% 1999 16.10% 17.50% -5.00% -1.20% 5.00% 0.74% 2.76% 12.30% 2000 3.60% 2.50% 17.80% 12.00% 6.20% 12.64% 7.36% 6.11% 2001 10.10% -9.40% 14.60% 5.50% 5.30% 10.06% 6.27% 5.15% 2002 -8.10% -26.90% 11.80% 8.80% 4.80% 6.62% 6.30% -9.76% 2003 15.90% 0.00% 8.80% 3.00% 4.90% 7.90% 4.91% 9.71% 2004 27.60% 10.80% 32.00% 7.00% 5.60% 21.12% 24.36% 23.44% 2005 21.10% 17.60% 12.50% 5.80% 5.70% 11.54% 6.40% 18.33% 2006 25.00% 12.30% 34.00% 3.10% 6.00% 19.84% 8.22% 22.99% 2007 18.00% -1.60% -8.40% 3.50% 6.80% 2.84% 4.62% 6.84% 2008 -40.40% -24.90% -54.00% 14.90% 7.60% -23.72% 2.90% -38.47% 2009 39.60% 5.00% 7.90% 1.70% 3.50% 11.76% 3.14% 22.88% 2010 3.20% -0.70% -1.10% 6.00% 4.40% 1.32% 4.17% 1.17% 2011 -10.50% -5.30% -1.50% 11.40% 5.00% 1.86% 5.63% -7.14% Total 214.20% 126.90% 166.40% 155.80% 114.70% 163.56% 142.33% 178.45% E®-Average 10.71% 6.35% 8.32% 7.79% 5.74% 8.18% 7.12% 8.92% ᶞStandard Deviation 7.07% 10.95% 10.24% 2.23% 0.00% -2.23% 4.47% 5.10% Q3.Important Features and characteristics of each of the asset classes: Cash “cash” asset is define as hot assets which can easily liquidate into cash at any time. This type of investment usually considers as low return investments, but has low in risk. If we analyze the table1 we can see that the rate of return in history and also expected rate of return is stable or in other words does not deviate uncertainly or with huge differences. That is why its standard deviation is low or almost nil as compared to other classes of asset. Bonds Bonds are just like loans. One of primary risk to investor is that borrower be unsuccessful to repay the money the investor lent. If we analyze the trend of rate of return of bonds in table 1 we get to know that fluctuation is higher than cash but on the other hand much better return is being generated as compared to cash. Average rate of return is more than double of that of cash but again standard deviation is high representing high rate of risk. Property Many people know about the property investments. Property investment is usually in shape of build home or any other type of building; that appreciate or devalue in value and provides a normal profits known as “rent”.Normally property investment generates a satisfactory returns as compared to cash and bonds but has more risk .According to data in Table1 the rate of reurns from year 1992 to 2006 is getting appreciated and overall average expected rate of return better than cash or bonds but inevitably results in greater risk or standard deviation. Share A share is companied issued legal document, which has some value in the market. Company’s Ownership can be in the shape of trade investment. Subsidiary or associate. It specifies the right of share holding pr voting power and also determines the amount of dividend to be received. Usually return from share is in the shape of dividends given by the companies. Q4. Expected return and risk in finanace Expected Retuurn The expected return from is an estimate of the future outcome from a risky asset If the expected return is equal to or greater than the required return then that asset can be purchased. Expected Return= Risk in Finance The possibility that Investor will lose money when they invest in a company that has debt, if the companys cash flow proves inadequate to meet its financial obligations.In other words risk of getting loss instead of profit is financial risk. Relationship The rate of return depends upon the risk associated with that investment. The greater the risk, the larger the return that is they are directly proportional to each other. This is one of the most fundamental relations in finance. The rate of return is what you earn on an investment, stated in percentage terms.If we analyze portfolio Kappa and Omega we can see that average expected rate of return are 7% and 8% approximately where as there risk or standard deviation is 4% and 5% approx. which means Omega with higher expected rate of return has higher risk and Kappa with low return has low risk. Q5. Diversification means reducing risk by investing in a variety of assets . If the asset values do not fluctuate in perfect synchrony,a diversified portfolio will have less risk than the weighted average risk of undiversified portfolio,The diversified portfolios return will always be higher than that of the worst-performing investment. So by diversifying, one can mitigate risk of investing solely in the asset that comes out worst. That is the role of diversification: it narrows the range of possible outcomes. If a person invest in both australian shares and property as well then the risk of loss can be ,mitigate as property has high risk and low return as compared to shares ,if person gets loss through its property its loss can be balanced with return generated by the shares but if he had only invested in property then he would not be able to balance its loss. Q6. Recommendation of most suitable Portfolio Analysis of Historic Return 1.Portfolio Beta If we analyze the historic financial performance we get to know that from year 1992 to 2006 the rate of return is fair except in 1994 with negative return of -5% but at year 2008 there is a huge downfall of return even goes to negative or loss of -23 % approx. but afterwards in 2009 its get stable and in 2011 it again goes to 1% only. Its expected rate of return tends to be average (8%)with very low or no risk at all. 2.Portfolio Kappa If we analyze the historic financial performance we get to know that from year 1992 to 2011 the rate of return is positive with no neative return or loss during the period but overall rate of return is low as compared to other two portfolios.Its expected rate of return tends to be positive 7% with standard deviation of 4% approx. 3.Portfolio Omega If we analyze the historic financial performance we get to know that from year 1992 to 2006 the rate of return is normal but at year 2008 there is a huge downfall of return even goes to negative or loss of -38 % approx. but afterwards in 2009 its get stable and in 2011 it again goes to negatine rate of -7%.Overall trend is not good but still its expected rate of return tends to be average (8%) with high risk of bad fluctuation again. Recommendation Portfolio Beta should the most suitable option as it generates highest return with lowest risk, Q7. To manage the increased fee charged by superannuation fund I would go with Portfolio Beta option as my expected average rate of return are high and chances of loss is low. In other words it brings me the highest return with lowest risk. APPEND Portfolio Packages Portfolio Beta Portfolio Kappa Portfolio omega Australian shares 20% cash 70% Australian shares 50% Property 40% Australian bond 20% International shares 30% Australian bond 40% Property 10% Property 20% Q1(a) WORKINGS(a) Year to Dec Portfolio Beta return Portfolio Kappa return 1992 20%*-2.3%+40%*7%+40%*10.5% 6.54% 70%*6.90%+20%*10.50%+10%*7% 7.63% 1993 20%*45.4%+40%*30.1%+40%*16.3% 27.64% 70%*5.4%+20%*16.3%+10%*30.1% 10.05% 1994 20%*-8.7%+40%*-5.6%+40%*-4.7% -5.86% 70%*5.3%+20%*-4.7%+10%*-5.6% 2.21% 1995 20%*-20.2%+40%*12.7%+40%*18.6% 8.48% 70%*8%+20%*18.6%+10%*12.7% 10.59% 1996 20%*14.6%+40%*14.5%+40%*11.9% 13.48% 70%*7.6%+20%*11.9%+10%*14.5% 9.15% 1997 20%*12.2%+40%*20.3%+40%*12.2% 15.44% 70%*5.6%+20%*12.2%+10%*20.3% 8.39% 1998 20%*11.6%+40%*18%+40%*9.5% 13.32% 70%*5.1%+20%*9.5%+10%*18% 7.27% 1999 20%*16.1%+40%*-5%+40%*-1.2% 0.74% 70%*5%+20%*-1.2%+10%*-5% 2.76% 2000 20%*3.6%+40%*17.8%+40%*12% 12.64% 70%*6.2%+20%*12%+10%*6.2% 7.36% 2001 20%*10.1%+40%*14.6%+40%*5.5% 10.06% 70%*5.3%+20%*5.5%+10%*14.6% 6.27% 2002 20%*-8.1%+40%*11.8%+40%*8.8% 6.62% 70%*4.8%+20%*8.8%+10%*11.8% 6.30% 2003 20%*15.9%+40%*8.8%+40%*3% 7.90% 70%*4.9%+20%*3%+10%*8.8% 4.91% 2004 20%*27.6%+40%*32%+40%*7% 21.12% 70%*32%+20%*7%+10%*5.6% 24.36% 2005 20%*21.1%+40%*12.5%+40%*5.8% 11.54% 70%*5.7%+20%*5.8%+10%*12.5% 6.40% 2006 20%*25%+40%*34%+40%*3.1% 19.84% 70%*6%+20%*3.1%+10%*34% 8.22% 2007 20%*18%+40%*-5.4%+40%*3.5% 2.84% 70%*6.8%+20%*3.5%+10%*-8.4% 4.62% 2008 20%*-40.4%+40%*-54%+40%*14.9% -23.72% 70%*7.6%+20%*14.9%+10%*-54% 2.90% 2009 20%*39.6%+40%*7.9%+40%*1.7% 11.76% 70%*3.5%+20%*1.7%+10%*3.5% 3.14% 2010 20%*-3.2%+40%*-1.1%+40%*6% 1.32% 70%*4.4%+20%*6%+10%*-1.1% 4.17% 2011 20%*-10.5%+40%*-1.5%+40%*11.4% 1.86% 70%*5%+20%*11.4%+10%*-1.5% 5.63% WORKING Portfolio Omega return   1.87% 50%*45.4%+30%*24.6%+20%*30.1% 36.10% 50%*-8.7%+30%*-7.6%+20%*-5.6% -7.75% 50%*20.2%+30%*26.5%+20%*12.7% 20.59% 50%*14.6%+30%*6.8%+20%*14.5% 12.24% 50%*12.2%+30%*41.7%+20%*20.3% 22.67% 50%*11.6%+30%*32.6%+20%*18% 19.18% 50%*16.1%+30%*17.5%+20%*-5% 12.30% 50%*3.6%+30%*2.5%+20%*17.8% 6.11% 50%*10.1%+30%*-9.4%+20%*14.6% 5.15% 50%*-8.1%+30%*-26.9%+20%*11.8% -9.76% 50%*15.9%+30%*0%+20%*8.8% 9.71% 50%*27.6%+30%*10.8%+20%*32% 23.44% 50%*21.1%+30%*17.6%+20%*12.5% 18.33% 50%*25%+30%*12.3%+20%*34% 22.99% 50%*18%+30%*-1.6%+20%*-8.4% 6.84% 50%*-40.4%+30%*-24.9%+20%*-54% -38.47% 50%*39.6%+30%*5%+20%*7.9% 22.88% 50%*3.2%+30%*-0.7%+20%*-1.1% 1.17% 50%*-10.5%+30%*-5.3%+20%*-1.5% -7.14% Q1(b) WORKIGS(B) Expected Average Return E® 214.2%/20 10.71% 126.9%/20 6.35% 166.4%/20 8.32% 155.8%/20 7.79% 114.7%/20 5.74% 163.56%/20 8.18% 142.33%/20 7.12% 178.45%/20 8.92%   Australian Shares (Standard Deviation) Single Period Return(A) Average Expected Return(B) Variance(A- B)^2 -0.023 0.1071 -0.02 0.454 0.1071 0.12 -0.087 0.1071 -0.04 0.202 0.1071 0.01 0.146 0.1071 0.00 0.122 0.1071 0.00 0.116 0.1071 0.00 0.161 0.1071 0.00 0.036 0.1071 0.01 0.101 0.1071 0.00 -0.081 0.1071 -0.04 0.159 0.1071 0.00 0.276 0.1071 0.03 0.211 0.1071 0.01 0.25 0.1071 0.02 0.18 0.1071 0.01 -0.404 0.1071 -0.26 0.396 0.1071 0.08 0.032 0.1071 0.01 -0.105 0.1071 -0.04 Total -0.10 Average= 1000/20 -50.00% standard Deviation= Square root of 50 7.07%   International Shares(Standard Deviation) Single Period Return(A) Average Expected Return(B) Variance(A- B)^2 0.054 0.06345 0.00 0.246 0.06345 0.03 -0.076 0.06345 -0.02 0.265 0.06345 0.04 0.068 0.06345 0.00 0.417 0.06345 0.12 0.326 0.06345 0.07 0.175 0.06345 0.01 0.025 0.06345 0.00 -0.094 0.06345 -0.02 -0.269 0.06345 -0.11 0 0.06345 0.00 0.108 0.06345 0.00 0.176 0.06345 0.01 0.123 0.06345 0.00 -0.016 0.06345 -0.01 -0.249 0.06345 0.10 0.05 0.06345 0.00 -0.007 0.06345 0.00 -0.053 0.06345 -0.01 Total 0.24 Average= 2400/20 120.00% standard Deviation= Square root of 120 10.95%   Property(Standard Deviation)   Single Period Return(A) Average Expected Return(B) Variance(A- B)^2 0.07 0.08 0.00 0.30 0.08 0.05 -0.06 0.08 -0.02 0.13 0.08 0.00 0.15 0.08 0.00 0.20 0.08 0.01 0.18 0.08 0.01 -0.05 0.08 -0.02 0.18 0.08 0.01 0.15 0.08 0.00 0.12 0.08 0.00 0.09 0.08 0.00 0.32 0.08 0.06 0.13 0.08 0.00 0.34 0.08 0.07 -0.08 0.08 0.03 -0.54 0.08 -0.39 0.08 0.08 0.00 -0.01 0.08 -0.01 -0.02 0.08 -0.01 Total -0.21 Average= 2100/20 -105.00% standard Deviation= Square root of 105 10.24%   Australian bonds (Standard Deviation)   Single Period Return(A) Average Expected Return(B) Variance(A- B)^2 0.11 0.08 0.00 0.16 0.08 0.01 -0.05 0.08 -0.02 0.19 0.08 0.01 0.12 0.08 0.00 0.12 0.08 0.00 0.10 0.08 0.00 -0.01 0.08 -0.01 0.12 0.08 0.00 0.06 0.08 0.00 0.09 0.08 0.00 0.03 0.08 0.00 0.07 0.08 0.00 0.06 0.08 0.00 0.03 0.08 0.00 0.04 0.08 0.00 0.15 0.08 0.01 0.02 0.08 0.00 0.06 0.08 0.00 0.11 0.08 0.00 Total 0.01 Average= 100/20 5.00% standard Deviation= Square root of 5 2.23% Cash (Standard Deviation) Single Period Return(A) Average Expected Return(B) Variance(A- B)^2 0.07 0.06 0.00 0.05 0.06 0.00 0.05 0.06 0.00 0.08 0.06 0.00 0.08 0.06 0.00 0.06 0.06 0.00 0.05 0.06 0.00 0.05 0.06 0.00 0.06 0.06 0.00 0.05 0.06 0.00 0.05 0.06 0.00 0.05 0.06 0.00 0.06 0.06 0.00 0.06 0.06 0.00 0.06 0.06 0.00 0.07 0.06 0.00 0.08 0.06 0.00 0.04 0.06 0.00 0.04 0.06 0.00 0.05 0.06 0.00 Total 0.00 Average= 0 0.00% standard Deviation= Square root of 0 0.00%   Portfolio Beta Risk (Standard Deviation)   Single Period Return(A) Average Expected Return(B) Variance(A- B)^2 0.0654 0.0818 0.00 0.2764 0.0818 0.04 -0.0586 0.0818 (0.01) 0.0848 0.0818 0.00 0.1348 0.0818 0.00 0.1544 0.0818 0.01 0.1332 0.0818 0.00 0.0074 0.0818 0.01 0.1264 0.0818 0.00 0.1006 0.0818 0.00 0.0662 0.0818 0.00 0.079 0.0818 0.00 0.2112 0.0818 0.02 0.1154 0.0818 0.00 0.1984 0.0818 0.01 0.0284 0.0818 0.00 -0.2372 0.0818 (0.10) 0.1176 0.0818 0.00 0.0132 0.0818 0.00 0.0186 0.0818 0.00 Total (0.01) Average= 100/20 5.00% standard Deviation= Square root of 5 -2.23%   Portfolio Kappa (Standard Deviation)   Single Period Return(A) Average Expected Return(B) Variance(A- B)^2 0.0763 0.071165 0.00% 0.1005 0.071165 0.09% 0.0221 0.071165 0.24% 0.1059 0.071165 0.12% 0.0915 0.071165 0.04% 0.0839 0.071165 0.02% 0.0727 0.071165 0.00% 0.0276 0.071165 0.19% 0.0736 0.071165 0.00% 0.0627 0.071165 0.01% 0.063 0.071165 0.01% 0.0491 0.071165 0.05% 0.2436 0.071165 2.97% 0.064 0.071165 0.01% 0.0822 0.071165 0.01% 0.0462 0.071165 0.06% 0.029 0.071165 0.18% 0.0314 0.071165 0.16% 0.0417 0.071165 0.09% 0.0563 0.071165 0.02% Total 0.04 Average= 400/20 20.00% standard Deviation= Square root of 20 4.47%   Portfolio Omega (Standard Deviation)   Single Period Return(A) Average Expected Return(B) Variance(A- B)^2 0.0187 0.089225 0.50% 0.361 0.089225 7.39% -0.0775 0.089225 2.78% 0.2059 0.089225 1.36% 0.1224 0.089225 0.11% 0.2267 0.089225 1.89% 0.1918 0.089225 1.05% 0.123 0.089225 0.11% 0.0611 0.089225 0.08% 0.0515 0.089225 0.14% -0.0976 0.089225 3.49% 0.0971 0.089225 0.01% 0.2344 0.089225 2.11% 0.1833 0.089225 0.89% 0.2299 0.089225 1.98% 0.0684 0.089225 0.04% -0.3847 0.089225 22.46% 0.2288 0.089225 1.95% 0.0117 0.089225 0.60% -0.0714 0.089225 2.58% Total 0.52 Average= 5200/20 26.10% standard Deviation= Square root of 26.1 5.10% Bibliography 1. Authority, Financial Service. "Rate if return for FSA prescribed projections." FSA Government of UK (June,2012): 40. 2. French, Eugene F. Fama and Kenneth R. "The cross-section of expected stock return ." The Journal of Finance (June, 1992): 38. 3. Hill, Chirs. "Community Share and Bond Issue." www.camberwellproject.com.uk (2012): 35. 4. Templeton, Franklin. "Why diversify?" Franklin journals (2009): 23. 5. www.cqu.edu.au. "Statistic and standard deviation ." Mathematic learning center (2009): 85. Read More

 

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