The Types of Asset Class - Example

Name: Lecture Course code: Date A REPORT ON RISKS AND RETURN AND THE MAJOR ASSETS CLASS The main aim of the research and study analysis is to gain further understanding on the difference types of assets class and their significance as well as considering factors of risks and return from an investment. A potential investor would ensure that a an investment would yield higher returns with lower risks if he is of the opinion that funds should be invested in the project Risks return trade off Every venture bears a number of risk, some of this risks include decline in purchasing power or reduction in capital value. However the returns from investment will reimburse for the risks as time goes by. Risks signify the degree to which an investment returns may rise or fall in the stock market and therefore high risks is always connected to high investment as well s low risks are inversely proportionate with low yield Managed funds This is a proficiently controlled investment portfolio in which a shareholder can decide to purchase part instead of shares. The venture aims of every managed fund are clearly clarified in the respective assets class and so cash invested will be significant to investment intention of that assets class. An investor in this managed fund will be allocated units in which the estimates will depend on the daily performance of the asset value in the security market. . Q1).workings 1989 Conservative fund (0.5*14.2+17.4*0.3+2.3*.2) =12.78% Balanced fund (0.4*17.4+14.2*0.5+18.4*0.1) =15.9 Growth fund (0.8*17.4+23.1*0.1+14.2*0.1) =15.57 1990 Conservative fund (19*0.5+-17.5*0.3+8.7*.2) =5.99 Balanced fund (0.4*17.5+19*0.5+16.1*0.1) =4.11 Growth fund (0.8*17.5+8.7*0.1+19*0.1) =-11.15 1991 Conservative fund (0.5*24.8+0.3*34.2+20.1*0.2) =26.68 Balanced fund (0.4*34.2+0.5*20.1+11.2*0.1) =24.85 Growth fund (0.8*34.2+20.5*.1+24.8*.1) =31.85 1992 Conservative fund (0.5*10.5+-2.3*0.3+7*.2) =5.96 Balanced fund (0.4*-2.3+0.5*7+6.9*0.1) =3.27 Growth fund (0.8*-2.3+7*.1+10.5*.1) =-0.09 1993 Conservative fund (0.5*16.3+45.4*0.3+30.1*.2) =27.79 Balanced fund (0.4*45.4+0.5*16.3+5.4*0.1) =26.85 Growth fund (0.8*45.4+.1*30.1+16.3*.1) = 40.96 1994 Conservative fund (0.5*-4.7+0.3*-8.7+-5.6.2) =-6.08 Balanced fund (0.4*-8.7+0.5*-4.7+5.3*0.1) =-5.3 Growth fund (0.8*-8.7+.1*-5,6+-4.7*0.1) = -7.99 1995 Conservative fund (0.5*18.6+20.2*0.3+12.7*.2) =11.9 Balanced fund (0.4*20.2+0.5*18.6+0.1*8) =18.18 Growth fund (0.8*20.2+.1*12.7+.1*18.6) = 30.12 1996 Conservative fund (0.5*11.9+14.6*0.3+14.5*.2) =13.23 Balanced fund (0.4*14.6+11.9*0.5+7.6*0.1) =12.55 Growth fund (0.8*14.6+.1*14.5+.1*11.9) =14.32 1997 Conservative fund (0.5*12.2+12.2*0.3+20.3*.2) =13.82 Balanced fund (0.4*12.2+12.2*0.5+5,6*0.1) =11.54 Growth fund (0.8*12.2+20.3*.1+12.3.1) = 13.03 1998 Conservative fund (0.5*9.5+11.6*0.3+18*.2) =10.03 Balanced fund (0.411.6+9.5*0.5+5.1*0.1) =9.9 Growth fund (0.8*11.6+8*.1+9.5*.1) =11.03 1999 Conservative fund (0.5*-1.2+0.3*16.1+-5*.2) =3.23 Balanced fund (0.416.1+0.5*-1.2+0.1*5) =6.34 Growth fund (0.8*16.1+.1*-5+-1.2*.1) =12.26 2000 Conservative fund (0.5*12+0.3*3.6+17.8*.2) = 8.64 Balanced fund (0.4*3.6+0.5*12+6.2*0.1) =8.06 Growth fund (0.8*3.6+17.8*.1+12*.1) =5.86 2001 Conservative fund (0.5*5.5+0.3*10.1+14.6*.2) =8.7 Balanced fund (0.4*10.1+0.5*5.5+5.3*0.1) =7.32 Growth fund (0.8*10.1+14.6*.1+5.5*.1) =10.09 2002 Conservative fund (0.5*8.8+-8.1*0.31+1.8*.2) =4.33 Balanced fund (0.4-8.1+8.8*0.5+4.8*0.1) =1.64 Growth fund (0.8*-8.1+11.8*.1+8.8*.1) = -4.42 2003 Conservative fund (0.5*3.1+0.3*25+3.4*.2) =8.3 Balanced fund (0.4*25+0.5*3.1+6*.1) =7 Growth fund (0.8*25+34*.1+3.1*.1) =13.9 2004 Conservative fund (0.5*7+0.327.6+32*.2) =18.18 Balanced fund (0.4*27.6+0.5*7+5.6*0.1) =15.1 Growth fund (0.8*27.6+3.2*.17*+.1) = 23.1 2005 Conservative fund (0.5*5.7+21.1*0.3+12.5*.2) =11.74 Balanced fund (0.4*21.1+0.5*55.8+5.70.1) =11.91 Growth fund (0.8*21.1+12.5*.1+5.8*.1) =18.71 2006 Conservative fund (0.5*3.1+0.3*25+34*.2) =15.85 Balanced fund (0.4*18+0.5*3.5+6.8*0.1) =12.15 Growth fund (0.8*18+.1*8.4+0.1*8.1) =23.71 2007 Conservative fund (0.5*3.5+18*0.3+-8.4.2) =0.61 Balanced fund (0.4*18+0.5*3.5+6.8*0.1) =3.15 Growth fund (0.8*18+0.5*-8.4+3.5*.1) =0.95 2008 Conservative fund (0.5*14.9+-4.04*0.3+-5.4.2) =-5.75 Balanced fund (0.4*-4.04+0.5*14.9+7,6*0.1) =-7.95 Growth fund (0.8*-4.04+.1*-5.4+14.9*.1) =31.37 2009 Conservative fund (0.5*1.7+39.6*0.3+7.9*.2) =14.31 Balanced fund (0.4*39.6+1.7*.5+3,.5*.1) =17.09 Growth fund (0.8*39.6+7.9*.1+1.7*.1) =32.64 2010 Conservative fund (0.5*6+3.2*0.3+-1.18.2) =3.74 Balanced fund (0.4*3.2+6*0.5+4.4*0.1) =4.73 Growth fund (0.8*3.2+-1.1*.1+6*.1) =3.05 2011 Conservative fund (0.5*11.4+-10.5*0.3+-1.5*.2) =2.25 Balanced fund (0.4*-10.5+11.4*0.5+5*0.1) =2 Growth fund (0.8*-10.6+.1*-1.5+.1*1*11.4) =7.41 2012 Conservative fund (0.5*7.7+18.18*0.3+33*.2) =16.09 Balanced fund (0.4*18.8+0.5*7.7+0.1*5) =11.87 Growth fund (0.8*18.8+33*.1+7.7*.1) =19.11 Q1a).expected return and the standard deviation Expect return=actual return*probability index Share E/R=18.18*(18.18/64.5) =5.45 Property 33 %*( 33/64.5)=16.88 Bond 7.7 %*( 7.7*64.5) = 0.92 Cash 5 %*( 5/64.5) =0.38 Conservative 16.9*(16.9/47.9) = 5.96 Balanced 11.89 %*( 11.89/47.9) = 2.95 Growth 19.11 %*( 19.11/47.9) = 7.62 Standard deviation= √ variance, but variance = actual returns-expected return) squared* probability indexes Shares Variances= (23.25-18.18)*0.282 =7.25 Standard deviation =√7.25 = 2.69 Property Variance (23.25-33)*0.5112=48.6 Standard deviation=√48.6 = 6.97 Bond Variance (23.25-7.7)*0.12= 20.016 Standard deviation =√20.016 =5.39 Cash Variances (23.25-5)*0.077=25.65 Standard deviation√ 25.65 = 5.06 Conservative fund Variance (16.53-16.9)*0.35 =0.1 Standard deviation √0.1 = 0.31 Balance fund Variance (16.53-11.89)*0.25 = 5.38 Standard deviation √5.38 = 2.32 Growth fund Variances (16.53-19.11)*0.4 = 2.6 Standard deviation √ 2.66 = 1.63 Q2.) Explain the essential features of managed funds and include in your answer Several advantages and disadvantages of investing in managed funds Essential feature of a managed fund include investment diversification with ease from one class of assets or companies to another. If an investor want to have assets transfer, the procedure would not require lot of complexity and making some transaction pertaining to clearing and forwarding of assets from one class of assets to another of the same corporation or another company in the same industry. if one need to do so, also, money invested in a managed fund is supervised by an expert who has relevant skill in the field of investment securities. An investor has an option re-investing his shares and take an advantage of compounding over 20 years The advantage of investing in managed funds is that an investor will realize a capital gain due to rise in price of the securities. Due to spread of fund between many companies, there is risk of expensive fee charged as management and administration fee of on fund invested is because fees a are different between funds and managers Q3) what is an asset class? Describe the features and the important An assets class is a group of securities with same features and distinctiveness, act comparable in the stock exchange with same act and convention of security exchange. It is significant to comprehend an assets class because, each assets has its own different level of risks and return in the market. An investor must have to gain knowledge and indulgent pertaining different classes of asset before making a move to invest the funds in the specified asset class that best fits your requirement. An investment with short term maturity may have its stock price increasing drastically as per the day to day performance in the stock market and at times the expected returns might be depressing or long term investment might generate higher returns over long period of time. Therefore an investors should take this factors into consideration before deciding an investment to spent on The advantage of investing in more than one assets class is that, there is reduction in risks due to diversification Shares Shares are element of a possession in the company by investors in Australia. These securities are being exercised in the market; they are bought and sold in the stock market depending on their performance. A shareholder will expect a return inform of dividend that are net of tax in which it was already paid by the company before being distributed as dividend as well as growth or loss of the shares. Global shares are similar with Australian shares but slight variance occur in that, an additional benefit inform of increased benefits would accrue from world wide investment. But thus investment suffers currency valuation which might turn out to be negative and thus leading to a decline in shares performance in the stock market Shares are amount invested in a company as capital. Shareholder of this classes asset receive dividend depending on the company date of issuances, dividend to shareholders will not be subject to tax in the hands of shareholders but are given as franked dividend Property This is type of assets investment in which an investor will be able to receive income from fund invested. Fund is used to develop more properties which will be hired as leases rental. Incomes generated from lease rental are subject to taxation. And a company is obliged to deduct tax before paying the retained earnings to shareholders unlike in shares where tax is not imposed on amount distributed as dividend to share holders Bonds These are funds invested in government securities, commercial bonds and hybrid securities. This fixed interest works comparable as loan borrowed. They are long-term in nature and shareholders of these securities will always receive interest upon a maturity. Bond interests are subject to taxation before they are distributed. Cash This is a venture in banks bills and related securities with diminutive asset time table. They offer a stable small risk returns, uniformly by way of interest payments. Q4). Explain what is meant by the expected return and the risk in finance. Include in Your answer the relationship between the two concepts and use your answers From Question 1 above to illustrate this relationship. Some investors tend to believe that there is a relation between reward and risks. But in real sense, a relation will exist between expected return and risks unlike reward because risks would not exist if a correlation between risks and reward existed. And investors will pay for the probability that a risks in the business would accrue. Expected return is the anticipated future gains from an investment by an investor. This is derived at by using formulae E/R = sum probability by actual returns, risks is the chance that actual return will be different from expected return that is investment in a project will not grow to earn profit from investment and it involves chances of loosing invested. It is derived by having a square root of variances’ high standard deviation imply that there is a high risk on an investment, from the above data analysis. A high risk of 6.97 with an investment return of 33% is observed from investment in property. This signifies that the relation between risk and return is that they are directly related in that a greater return involves great risks and thus the rule is that to be ready to admit the risk of anticipated poor return generated from an investment, one must be rewarded with greater investment. Q5). Identify and discuss some of the risks that you may face by choosing to invest in a managed fund The risks are that in managed funds, funds are spread within different companies, different companies and director’s charges different amount on the funds. If a company with high performance of securities in the stock market is linked to part of your managed fund, then an investor with minimum portion assets value in the business will be susceptible to high charges and fees .the effect is that, the value of the security will be reduced in paying for the charges and thus an investor might end up losing the value of original investment. Q6). Discuss the meaning of diversification in finance and how it impacts the risk and the return. Again use your answers from Question 1 to illustrate Making a prediction on financial market performance is quite hard. If it was practical to make an analysis of how share price are going to trade in the near future, then an Australian investor would be very rich the best way of managing your assets performance is performance assets diversification . Diversifications means spreading investment asset in different companies instead of placing investment in one company. The reason of assets/ investment diversification is that poor returns from an investment will not have a great impact to an investor inform of financial loss. This is because risk of one company will not affect other company’s performance. From the above data analysis, investment in has a low yield and a high risk but investment in conservative fund as standard deviation of 0.31implying a lower risk on investment. The means that an investor holding a portfolio in this company will not suffer lose of investing in property development but will gain income from other investments The performance of an investment depends on the specific class of assets and thus diverse investment perform in a different way under dissimilar market situation and thus an investor who diversify his investment will benefit from reduction in risks diversification in the whole portfolio. The best way to diversify your portfolio is either by investing in diverse assets class or investing in more than one category in each assets class such as shares investment in numerous dissimilar businesses. Q7). Funds to invest in YEARS CONSERVATIVE BALLANCED GROWTH 2008 -5.75 -7.94 31.37 2009 14.31 17.09 32.64 2010 3.74 4.73 3.05 2011 2.25 2 7.41 2012 16.69 11.87 19.11 From the above data analysis, it isworthwhile investing in conservative fund,this depicted by their trend perfomance which is quite higher than other fund peromance.qualitatively,conservative fund has a lower risk of return of 0,31 representing a lowest risky project from the three investment. In conclusion,potential investors are encourage to have a detaill analysiss and understanding of an assets class before making an intern to invest the fund.assets diversification is the best option of minimising risks and increasing on the returns.using the qualitative technique in analysing project appraisssal,it is advisable to consider a project with low standard deviation of less than one with a higher viarance analysis.this is due to the fact that standard deviation depicts the risksness of a project.the higher the value of standard deviation,the higher the risks of the project and the vice versa. Read More