FUNDAMENTALS OF FINANCE - Assignment Example

From the Table in 4(a), it is evident that the higher the portfolio’s expected returns, the higher the standard deviation. This also means that the higher the returns the higher the risk, hence the above discussed risk-return relationship holds for shares property and bonds. This relationship is also observed in the chart in 4(b), since, for example, the shares are moving more radically and their returns are the highest; and this trend holds even for property and bonds. The radical plunge in prices in the last quarter of 2008 is majorly attributable to the effect of the global financial crisis that occurred during that time.

This decline in prices was a major indicator of the crisis, which was accompanied by a significant reduction in demand in the financial markets, as many people observed their retirement accounts water down (Bartram and Gordon, 2009; Dwyer and Paula, 2009 ). It is important that the investments are spread over a variety of assets like the fixed income, equities and cash. This is because each asset class perfoms differently from the others as a result of its unique balance of risks and rewards.

Diversification calls for the need to know the security an investor needs. Therefore, diversification is where there is a need to spread each asset investment over different types of securities. Most importantly, an investors needs to know their risk profile so they decide how to allocate their assets, on the basis of risk-return relationship. From example, from 4(a), one can combine growth fund which is very risky, with conservative fund which is less risky – so that one can continue enjoying substantial returns and even in the event of a crisis one does not lose significantly (Kapur and Orszag, 1999). b. If your group had $50,000 to invest in a managed fund, which specific portfolio would you choose from those offered in Question 4?

Justify your choice by including a reference to the characteristics of financial