Superannuation Fund, Australian and International Shares - Assignment Example

Running hеаd: THE FINANCIAL REPORT By [Students’ Names] [Faculty Name] [Dеpаrtmеnt or School’s Name] [Date] Table of Contents (Q.2) Purpose of a superannuation fund 5 (Q. 3) Features and Characteristics of: 5 Australian and international shares: 5 Property: 6 Bonds: 6 Cash 6 (Q.4) Meaning of expected return and risk in finance 7 Relationship between the expected return and risk 7 (Q. 5) Meaning of diversification and its impact on the risk and the return 7 (Q. 6). Recommendation and justification of the most suitable portfolio option. 7 Customer 1: - Portfolio GAMMA: 7 Customer 2 (Ken and Vicky): - Portfolio ALPHA: 8 Customer 3 (Jason): -Portfolio BETA: 8 (Q. 7). The choice for portfolio option 8 References 17 Dec. (Asset A) (Asset B) (Asset D) 1991 34.20% 20.90% 20.10% 24.70% 11.20% 30.13% 27.12% 17.03% 1992 -2.30% 5.40% 7.00% 10.50% 6.90% 0.17% 4.33% 8.00% 1993 45.40% 24.60% 30.10% 16.30% 5.40% 39.71% 32.08% 13.61% 1994 -8.70% -7.60% -5.60% -4.70% 5.30% -8.17% -6.57% 0.12% 1995 20.20% 26.50% 12.70% 18.60% 8.00% 20.71% 17.47% 12.12% 1996 14.60% 6.80% 14.50% 11.90% 7.60% 13.03% 13.76% 10.27% 1997 12.20% 41.70% 20.30% 12.20% 5.60% 18.91% 14.63% 10.52% 1998 11.60% 32.60% 18.00% 9.50% 5.10% 16.44% 12.89% 9.00% 1999 16.10% 17.50% -5.00% -1.20% 5.00% 14.27% 4.58% 1.14% 2000 3.60% 2.50% 17.80% 12.00% 6.20% 4.80% 10.38% 10.26% 2001 10.10% -9.40% 14.60% 5.50% 5.30% 6.65% 10.07% 7.22% 2002 -8.10% -26.10% 11.80% 8.80% 4.80% -9.71% 2.94% 7.40% 2003 15.90% 0.00% 8.80% 3.00% 4.90% 12.01% 9.90% 5.11% 2004 27.60% 10.80% 32.00% 7.00% 5.60% 24.68% 22.74% 11.3% 2005 21.10% 17.60% 12.50% 5.80% 5.70% 19.54% 13.93% 7.09% 2006 25.00% 12.30% 34.00% 3.10% 6.00% 23.36% 21.13% 10.73% 2007 18.00% -1.60% -8.40% 3.50% 6.80% 11.44% 5.73% 2.77% 2008 -40.40% -24.90% -54.00% 14.90% 7.60% -38.66% -27.89% -2.53% 2009 39.60% 5.00% 7.90% 1.70% 3.50% 29.51% 18.72% 3.84% 2010 3.20% -0.70% -1.10% 6.00% 4.40% 1.99% 2.75% 3.78% E (R) 12.95% 7.66% 9.40% 8.46% 6.05% 11.53% 10.53% 7.44% RISK - - - - - - - - TABLE ONE : Historical returns for the major asset classes (Source : Mercer, Iress, Datastream & Investment Solutions) Year to DEC Australian shares (Asset A) International shares (Asset B ) Property (Asset C) Australian Bonds (Asset D) Cash (Asset E) PORTFOLIO ALPHA PORTFOLIO BETA PORTFOLIO GAMMA 1991 34.20% 20.90% 20.10% 24.70% 11.20% 30.13% 27.12% 17.0300% 1992 -2.30% 5.40% 7.00% 10.50% 6.90% 0.17% 4.33% 8.0000% 1993 45.40% 24.60% 30.10% 16.30% 5.40% 39.71% 32.08% 13.6100% 1994 -8.70% -7.60% -5.60% -4.70% 5.30% -8.17% -6.57% 0.1200% 1995 20.20% 26.50% 12.70% 18.60% 8.00% 20.71% 17.47% 12.1200% 1996 14.60% 6.80% 14.50% 11.90% 7.60% 13.03% 13.76% 10.2700% 1997 12.20% 41.70% 20.30% 12.20% 5.60% 18.91% 14.63% 10.5200% 1998 11.60% 32.60% 18.00% 9.50% 5.10% 16.44% 12.89% 9.0000% 1999 16.10% 17.50% -5.00% -1.20% 5.00% 14.27% 4.58% 1.1400% 2000 3.60% 2.50% 17.80% 12.00% 6.20% 4.80% 10.38% 10.2600% 2001 10.10% -9.40% 14.60% 5.50% 5.30% 6.65% 10.07% 7.2200% 2002 -8.10% -26.90% 11.80% 8.80% 4.80% -9.87% 2.94% 7.4000% 2003 15.90% 0.00% 8.80% 3.00% 4.90% 12.01% 9.90% 5.1100% 2004 27.60% 10.80% 32.00% 7.00% 5.60% 24.68% 22.74% 11.3000% 2005 21.10% 17.60% 12.50% 5.80% 5.70% 19.54% 13.93% 7.0900% 2006 25.00% 12.30% 34.00% 3.10% 6.00% 23.36% 21.13% 10.7300% 2007 18.00% -1.60% -8.40% 3.50% 6.80% 11.44% 5.73% 2.7700% 2008 -40.40% -24.90% -54.00% 14.90% 7.60% -38.66% -27.89% -2.5300% 2009 39.60% 5.00% 7.90% 1.70% 3.50% 29.51% 18.72% 3.8400% 2010 3.20% -0.70% -1.10% 6.00% 4.40% 1.99% 2.75% 3.7800% Expected Return 12.95% 7.66% 9.40% 8.46% 6.05% 11.53% 10.53% 7.44% Variance 3.6442% 3.0828% 3.6257% 0.4908% 0.0277% 2.9829% 1.6552% 0.2381% standard deviation (RISK) 19.09% 17.56% 19.04% 7.01% 1.66% 17.27% 12.87% 4.88% coefficient of variation 1.47469167 2.29364187 2.02568036 0.82861 0.275322 1.497596187 1.221261734 0.65587425 The table above answers question 1 (a) and 1 (b) (Q.2) Purpose of a superannuation fund The principal of the superannuation fund is provision of financial resources including many other benefits to its beneficiaries at the time of their retirement. In some superannuation funds the benefits may include disability benefits and death benefits (for the surviving dependants of the member of the scheme). This arrangement enables people to have an income of their own after retirement. Definitely after retirement many people will have advanced in age and may not be in a position to provide for themselves and therefore they may become dependant on their relative and the government. This problem is thus addressed by contributing in a superannuation fund. This is what is commonly referred to as saving for your future. In addition, it helps someone to accumulate cash in the fund which he can retire them at some future date and make an investment out of the lump sum he receive from the fund. (Q. 3) Features and Characteristics of: Australian and international shares: A share is an investment that entitles someone to an ownership in the company. That is if you buy some shares in Australian company you become an of the company together with the others who have bought the same shares in that company. This means that you become a co-owner with them. In short a share means a unit ownership in the company. Shares are of different types and categories. These are preference shares and ordinary shares. Preference shares have a preferential payment prior to the ordinary shares, however; they do not have voting rights. Preference shares may be redeemable or irredeemable. They have a fixed rate of dividend upon declaration of dividends by the bond of directors of the company. Ordinary shares have a voting right regarding the running of the affairs of the company. Dividends on ordinary shareholders are paid only in the year the dividends are declared. That is, if in a certain year the company incurs a loss the company is under no strict obligation to pay dividends to the shareholders unlike the case with preference shares where the company has to pay the dividends that was not paid in a particular year when there was loss and pay the balance in the year the company realise a profit. A portfolio of international shares is never hedged against movement of the currency and as a result both the currency and the movement of the price of the shares are mirrored in their results. This explains why the expected return of international shares is lower than the expected return of the Australian shares (that is, 7.66% < 12.95%). Since international shares are affected by these factors there can be never certainty on the price of these shares as the market keeps fluctuating. Due to the degree of uncertainty attributed with these shares the returns expected out of an investment in international shares will also be low. Shares can be listed or unlisted in the stock exchange market Property: A property does not have a “fixed maturity date”. This makes it easier to dispose it at any appropriate time. That is, there is so much fluctuations and hence uncertainties in the investment outcomes of property and this explains why the expected return is more less than the risk of investment (compare E (R) of 9.40% and risk of 19.04%). An investor is assumed to be a rational economic man and that he will take advantage of any investment opportunities that comes his way. He is assumed to maximize his gains and at the same time minimizing on his losses. Since an individual is at liberty to deal with his property in the manner he deems best, the general investment in property becomes completely unpredictable and hence unstable. This explains why the level of risk associated with the investment in property is all time high. A property is also real which means that an investor can exercise some physical control upon his investment which is hardly the case with bonds or stocks. This freedom of control interferes with the market of property as individual investors will dispose of their property without first having a clear understanding of the market and that is why investment in property has low expected return compared to the Australian bonds (8.46%) As property is tangible it requires hands-on management which is a bit tricky with most investors and due to poor management the results obtained from this investment is not that impressive as compared with other investments like Australian shares (12.95% - expected return). Bonds: Bonds are “debt instruments” which are issued by the government or corporations in borrowing money from the public. Bonds usually have a fixed maturity period at which the principal face amount of the bond is repaid. The bond issuer will most often determine the lifetime of the bond before it is sold to the potential investors. Apart from the repayment of the principal amount the bond holders are paid an interest (at a specified rate) as a consideration for the money they led into the company. In the calculation of the present value of bonds the discount rate (risk) is used and also the timing. For instance, the Australian bonds will be discounted to the present using a discount rate of 7.01% over a period of 20 years. Cash Cash is the most liquid asset of the company. It is maintained in the business at a considerable level so as to take advantage of the short term investment project and at the same time to meet the short-term obligations (financial) immediately as they fall due. Investment in cash is a short term undertaking and hence the uncertainty is also low. This explains why the historical returns from the investment in cash (Asset E) is always positive whereas investment in other assets like property (Asset C) it has a series of positive and negative returns ( for example in the year 2008 it has a negative return of -54.00%). The higher the risk the higher the return and since investment in cash assets is a short term investment (low risk of 1.66%) the expected return out of this investment will also be low, that is, 6.05%. (Q.4) Meaning of expected return and risk in finance Expected return, in finance, is the cash flow anticipated to accrue out of an investment project (Taylor, 2005). In finance, risk describes the chance that an expected income will not be realized. For instance the risk that the expected return of 8.46% out of the investment in Australian bonds will not be realized is 7.01%. That is the unpredictability of the outcome of an investment project. You may realise your target return or fail to meet it altogether. Relationship between the expected return and risk The level of risk associated with a given cash flow (expected return) can significantly affect the value of the return (Dixon, 2010). The greater the risk a cash flow is the lower is its value. Therefore, the higher the risk the higher the expected return should be and the reverse is true. As an illustration consider an investment in Australian shares and an investment in cash (Asset D). The higher risk of investment in Australian shares (19.09%) is expected to yield high return of 12.95% while the lower risk of investing in Asset D (1.66%) a lower return of 6.05% is expected. (Q. 5) Meaning of diversification and its impact on the risk and the return Diversification, in finance, simply means the reduction of risk by making investment in various assets. It is a technique for reducing the investment risk. If the value of the asset does not move up or move down in a correct synchrony, a portfolio (diversified) will have a lesser risk compared to the “weighted average risk” of its component assets, and usually a less risk in comparison with the ‘least risky’ among its constituents. For instance, in portfolio Alpha 30.13% in a combination of various assets (Australian shares, International shares and property) is less than the investment in only one share (Australian shares) of 34.20% in year 1991. (Q. 6). Recommendation and justification of the most suitable portfolio option. Customer 1: - Portfolio GAMMA: This option has the least risk of 4.88% and as such it is affordable for this customer as an investor cannot risk more than he can afford. Being a graduate he should not risk more from inception. Notice that this option also accrues returns (7.44%) that are higher than the risk itself. Therefore, this is a viable portfolio for Leonora. Customer 2 (Ken and Vicky): - Portfolio ALPHA: This portfolio provides the highest return (11.53%) however its risk is also high (17.27%). The combined income of this couple can be significant enough to invest in portfolio BETA. The can afford to risk in this portfolio since they do not have dependants (their three children are high income earners) and therefore, if the portfolio made a loss in a particular year it cannot destabilize their income so much. Customer 3 (Jason): -Portfolio BETA: Jason as an older member of the work force must have saved enough fortune in his superannuation and as such he can afford to invest in portfolio Beta which is not as risky as portfolio Alpha (12.87% < 17.27% )and its expected returns are higher than that of portfolio Gamma (10.53% > 7.44%) (Q. 7). The choice for portfolio option Portfolio GAMMA. This is because the expected return of this portfolio is higher than the risk inherent in the investment (7.44% > 4.88%). The other portfolio options ALPHA and BETA have a higher risk than the expected return (Abbott, 2008). This means that the chances of losing in portfolio Gamma is low as compared to the other portfolio options. The principal rule in any investment is that you should make your decision on whether to invest or not the relationship between expected returns and the level of risk. When the risk is too high such an investment should be avoided. Based on these postulations the portfolio option which is promising to invest in is Portfolio GAMMA. Portfolio ALPHA’s Return for 1991 = (0.7) x34.20% + (0.2) x 20.9% + (0.1) x 21.0% = 30.13% Portfolio BETA’s Return for 1991 = (0.4) x 34.2% + (0.3) x 21.0% + (0.3) x 24.7% = 27.12% Portfolio GAMMA’s Return for 1991 = (0.5) x 11.2% + (0.3) x24.7% + (0.2) x 20.1% = 17.03% Portfolio ALPHA’s Return for 1992 = (0.7) x -2.3% + (0.2) x 5.40% + (0.1) x 7.00% = 0.17% Portfolio BETA’s Return for 1992 = (0.4) x -2.3% + (0.3) x 7.00% + (0.3) x 10.5% = 4.33% Portfolio GAMMA’s Return for 1992 = (0.5) x 6.90% + (0.3) x 10.5% + (0.2) x 7.00% = 8.00% Portfolio ALPHA’s Return for 1993 = (0.7) x 45.40% + (0.2) x24.6% + (0.1) x 30.1% = 39.71% Portfolio BETA’s Return for 1993 = (0.4) x 45.40% + (0.3) x 30.1% + (0.3) x 16.3% = 32.08% Portfolio GAMMA’s Return for 1993 = (0.5) x 5.40% + (0.3) x16.3% + (0.2) x 30.1% = 13.61% Portfolio ALPHA’s Return for 1994 = (0.7) x -8.70% + (0.2) x -7.60% + (0.1) x -5.6% = -8.17% Portfolio BETA’s Return for 1994 = (0.4) x -8.70% + (0.3) x -5.6% + (0.3) x -4.70% = -6.57% Portfolio GAMMA’s Return for 1994 = (0.5) x 5.3% + (0.3) x -4.70% + (0.2) x -5.60% = 0.12% Portfolio ALPHA’s Return for 1995 = (0.7) x 20.2% + (0.2) x26.50% + (0.1) x 12.7% = 20.71% Portfolio BETA’s Return for 1995 = (0.4) x 20.2% + (0.3) x 12.7% + (0.3) x 18.6% = 17.47% Portfolio GAMMA’s Return for 1995 = (0.5) x 8.0% + (0.3) x 18.6% + (0.2) x 12.7% = 12.12% Portfolio ALPHA’s Return for 1996 = (0.7) x 14.60% + (0.2) x6.8% + (0.1) x 14.50% = 13.03% Portfolio BETA’s Return for 1996 = (0.4) x 14.6% + (0.3) x 14.50% + (0.3) x 11.9% = 13.76% Portfolio GAMMA’s Return for 1996 = (0.5) x7.6% + (0.3) x 11.9% + (0.2) x 14.50% = 10.27% Portfolio ALPHA’s Return for 1997 = (0.7) x 12.2% + (0.2) x 41.7% + (0.1) x 20.3% = 18.91% Portfolio BETA’s Return for 1997 = (0.4) x 12.2% + (0.3) x 20.3% + (0.3) x 12.2% = 14.63% Portfolio GAMMA’s Return for 1997 = (0.5) x5.60% + (0.3) x 12.2% + (0.2) x 20.3% = 10.52% Portfolio ALPHA’s Return for 1998 = (0.7) x 11.60% + (0.2) x32.6% + (0.1) x 18.0% = 16.44% Portfolio BETA’s Return for 1998 = (0.4) x 11.60% + (0.3) x 18.0% + (0.3) x 9.5% = 12.89% Portfolio GAMMA’s Return for 1998 = (0.5) x 5.1% + (0.3) x 9.5% + (0.2) x 18.0% = 9.00% Portfolio ALPHA’s Return for 1999 = (0.7) x 16.1% + (0.2) x 17.50% + (0.1) x -5.0% = 14.27% Portfolio BETA’s Return for 1999 = (0.4) x 16.1% + (0.3) x -5.0% + (0.3) x -1.2% = 4.58% Portfolio GAMMA’s Return for 1999 = (0.5) x 5.0% + (0.3) x -1.20% + (0.2) x -5.00% = 1.14% Portfolio ALPHA’s Return for 2000 = (0.7) x 3.6% + (0.2) x 2.5 % + (0.1) x 17.80% = 4.48% Portfolio BETA’s Return for 2000 = (0.4) x 3.6% + (0.3) x 17.80% + (0.3) x 12.0% = 10.38% Portfolio GAMMA’s Return for 2000 = (0.5) x 6.2% + (0.3) x 12.0% + (0.2) x 7.8% = 10.26% Portfolio ALPHA’s Return for 2001 = (0.7) x 10.1% + (0.2) x -9.40% + (0.1) x 14.6% = 6.65% Portfolio BETA’s Return for 2001 = (0.4) x 10.1% + (0.3) x 14.6% + (0.3) x 5.5% = 10.07% Portfolio GAMMA’s Return for 2001 = (0.5) x 5.3% + (0.3) x5.5% + (0.2) x 14.6% = 7.22% Portfolio ALPHA’s Return for 2002 = (0.7) x -8.1% + (0.2) x -26.1% + (0.1) x 11.8% = -9.71% Portfolio BETA’s Return for 2002 = (0.4) x -8.10% + (0.3) x 11.8% + (0.3) x 8.8% = 2.94% Portfolio GAMMA’s Return for 2002 = (0.5) x 4.8% + (0.3) x 8.8% + (0.2) x 11.80% = 7.40% Portfolio ALPHA’s Return for 2003 = (0.7) x 15.9% + (0.2) x 0.0% + (0.1) x 8.80% = 12.01% Portfolio BETA’s Return for 2003 = (0.4) x 15.9% + (0.3) x 8.80% + (0.3) x 3.00% = 9.90% Portfolio GAMMA’s Return for 2003 = (0.5) x 4.9% + (0.3) x 3.00% + (0.2) x 8.80% = 5.11% Portfolio ALPHA’s Return for 2004 = (0.7) x27.6% + (0.2) x 10.8% + (0.1) x 32.00% = 24.68% Portfolio BETA’s Return for 2004 = (0.4) x 27.6% + (0.3) x 32.00% + (0.3) x 7.00% = 22.74% Portfolio GAMMA’s Return for 2004 = (0.5) x 5.60% + (0.3) x7.00% + (0.2) x 32.0% = 11.30% Portfolio ALPHA’s Return for 2005 = (0.7) x 21.1% + (0.2) x 17.6% + (0.1) x 12.5% = 19.54% Portfolio BETA’s Return for 2005 = (0.4) x 21.1% + (0.3) x 12.5% + (0.3) x 5.8% = 13.93% Portfolio GAMMA’s Return for 2005 = (0.5) x 5.70% + (0.3) x 5.8% + (0.2) x 12.5% = 7.09% Portfolio ALPHA’s Return for 2006 = (0.7) x25.0% + (0.2) x 12.30% + (0.1) x 34.0% = 23.36% Portfolio BETA’s Return for 2006 = (0.4) x 25.0% + (0.3) x 34.0% + (0.3) x 3.1% = 21.13% Portfolio GAMMA’s Return for 2006 = (0.5) x 6.0% + (0.3) x 3.1% + (0.2) x 34.0% = 10.73% Portfolio ALPHA’s Return for 2007 = (0.7) x 18.0% + (0.2) x -1.60% + (0.1) x -8.4% = 11.44% Portfolio BETA’s Return for 2007 = (0.4) x 18.0% + (0.3) x -8.4% + (0.3) x 3.5% = 5.73% Portfolio GAMMA’s Return for 2007 = (0.5) x 6.80% + (0.3) x 3.5% + (0.2) x -8.40 % = 2.77% Portfolio ALPHA’s Return for 2008 = (0.7) x -40.4% + (0.2) x -24.9% + (0.1) x54.0% = -8.66% Portfolio BETA’s Return for 2008 = (0.4) x -40.4% + (0.3) x 54.0% + (0.3) x 14.9% = -27.89% Portfolio GAMMA’s Return for 2008 = (0.5) x 7.6% + (0.3) x 14.9% + (0.2) x -54.0% = -2.53% Portfolio ALPHA’s Return for 2009 = (0.7) x 39.6% + (0.2) x 5.0% + (0.1) x 7.9% = 29.51% Portfolio BETA’s Return for 2009 = (0.4) x 39.6% + (0.3) x 7.9% + (0.3) x 1.70% = 18.72% Portfolio GAMMA’s Return for 2009 = (0.5) x 3.50% + (0.3) x 1.70% + (0.2) x 7.90% = 3.84% Portfolio ALPHA’s Return for 2010 = (0.7) x 3.2% + (0.2) x -0.70% + (0.1) x -1.10% = 1.99% Portfolio BETA’s Return for 2010 = (0.4) x 3.2% + (0.3) x -1.10% + (0.3) x 6.00% = 2.75% Portfolio GAMMA’s Return for 2010 = (0.5) x 4.40% + (0.3) x 6.00% + (0.2) x 1.10% = 3.78% Calculations for Expected Returns Expected Return for an asset = historical returns/ number of years (20) Expected Returns for Australian shares (Asset A): (34.2% -2.3%+45 .4% -8.7% +20.2% +14.6% +12.2% +11.6% +16.1% +3.6% +10.1% -8.1% +15.9% +27.6% +21.1% +25.0% +18.0% -40.4% +39.6% +3.2%)/20 = 12.95% Expected Return for International shares (Asset B): (20.9% +5.4% +24.6% -7.6% +26.5% +6.8% +41.7% 32.6% +17.5% +2.5% -9.4% -26.1% +0.0% +10.8% +17.6% +12.3% -1.6% -24.9% +5.0% -0.7%)/ 20 = 7.66% Expected Return for Property (Asset C): (20.1% +7.0% +30.1% -5.6% +12.7% +14.5% +20.3% + 18.0% -5.0% +17.8% +14.6% +11.8% +8.8% +32.0% +12.5% +34.0% -8.4% -54.0% + 7.9% -1.1% ) = 9.40% Expected return for Australian Bond (Asset D): (24.7% +10.5% +16.3% -4.7% +18.6% +11.9% +12.2% +9.5% 1.2% +12.0% +5.5% +8.8% +3.0% +7.0% +5.8% +3.1% +3.5% +14.9% +1.7% +6.0% ) / 20 = 8.46% Expected Return for Cash (Asset E): (11.2% +6.9% +5.4% +5.3% +8.0% +7.6% +5.6% +5.1% +5.0% +6.2% +5.3% + 4.8% +4.9% +5.6% +5.7% +6.0% +6.8% +7.6% +3.5% +4.4% ) / 20 = 6.05% Expected Return for Portfolio ALPHA: (30.13% +0.17% +39.71% -8.17% +20.71% +13.03% +18.91% +16.44% 14.27%+4.8%+6.65% -9.71% +12.01% +24.68% +19.54% +23.36% +11.44% -38.66% +29.51% +1.99% ) / 20 =11.53% Expected Return for Portfolio BETA: (27.12% +4.33% +32.08% -6.57% +17.47% +13.76% +14.63% +12.89% +4.58% +10.38% +10.07% +2.94% +9.9% +22.74% +13.93% +21.13% +5.73% -27.89% +18.72% +2.75% ) / 20 = 10.53% Expected Return for Portfolio GAMMA: (17.03% +8.0% +13.61% +0.12% +12.12% +10.27% +10.52% +9.0% +1.14% +10.26% +7.22% +7.4% +5.11% +11.3% +7.09% +10.73% +2.77% -2.53% +3.84% +3.78% ) / 20 = 7.44% Calculations of risk Risk will be the standard deviation of the historical returns from year 1991-year 2010. We first find the variance and then the square root of the variance will give the risk. Risk of the Australian share (Asset A): E (R) or mean = 12.95% Variance = ((34.2% -12.95%)^2 +( -2.3% -12.95%)^2 +(45 .4% -12.95%)^2 +( -8.7% -12.95%)^2 +(20.2% -12.95%)^2 +(14.6%-12.95%)^2 +(12.2% -12.95%) ^2+(11.6% -12.95%)^2 +(16.1% -12.95%)^2 +(3.6% -12.95%)^2 +(10.1% -12.95%)^2 +( -8.1% -12.95%)^2 +(15.9% -12.95%)^2 +(27.6% -12.95%)^2 +(21.1% -12.95%)^2 +(25.0% -12.95%)^2 +(18.0% -12.95%)^2 +( -40.4% -12.95%)^2 +(39.6% -12.95%) +(3.2% -12.95%))/20 = 3.6442% Risk = √ (3.6442%) = 19.09% Risk of the International share (Asset B): E (R) or mean = 7.66% Variance =( (20.9% -7.66%) ^2 +(5.4% -7.66%)^2 +(24.6% -7.66%)^2 + ( -7.6% -7.66%)^2 +(26.5% -7.66%)^2 +(6.8% -7.66%)^2 +(41.7% -7.66%)^2 +( 32.6% -7.66%)^2 +(17.5% -7.66%)^2 +(2.5% -7.66%)^2 +( -9.4% -7.66%)^2 +( -26.1% -7.66%)^2 +(0.0% -7.66%)^2 +(10.8% -7.66%)^2 +(17.6% -7.66%)^2 +(12.3% -7.66%)^2 +( -1.6% -7.66%)^2 +( -24.9% -7.66%)^2 +(5.0% -7.66%)^2 +( -0.7% -7.66%)^2)/ 20 = 3.0828% Risk = √ (3.0828%) = 17.56% Risk of the Property (Asset C): E (R) or mean = 9.40% Variance = ((20.1% -9.4%)^2 +(7.0% -9.4%)^2 +(30.1% -9.4%)^2 +( -5.6% -9.4%)^2+(12.7% -9.4%)^2 +(14.5% -9.4%)^2 +(20.3% -9.4%)^2 +( 18.0% -9.4%)^2 +( -5.0% -9.4%)^2 +(17.8% -9.4%)^2 +(14.6% -9.4%)^2 +(11.8% -9.4%)^2 +(8.8% -9.4%)^2 +(32.0% -9.4%)^2 +(12.5% -9.4%)^2+(34.0% -9.4%)^2+( -8.4% -9.4%)^2 +( -54.0% -9.4%)^2 + (7.9% -9.4%)^2 +( -1.1% -9.4% )^2)/20 = 3.6257% Risk = √ (3.6257%) = 19.04% Risk of the Australian Bond (Asset D): E (R) or mean = 8.46% Variance = ((24.7% -8.46%)^2+(10.5% -8.46%)^2 +(16.3% -8.46%)^2 +(-4.7% -8.46%)^2 +(18.6% -8.46%)^2 +(11.9% -8.46%)^2 +(12.2% -8.46%)^2 +(9.5% -8.46%)^2+ (1.2% -8.46%)^2 +(12.0% -8.46%)^2 +(5.5% -8.46%)^2 +(8.8% -8.46%)^2+(3.0% -8.46%)^2 +(7.0% -8.46%)^2 +(5.8% -8.46%)^2 +(3.1% -8.46%)^2 +(3.5% -8.46%)^2+(14.9% -8.46%)^2 +(1.7% -8.46%)^2 +(6.0% -8.46% )^2) / 20 = 0.4908% Risk = √ (0.4908%) = 7.01% Risk of the Cash (Asset E): E (R) or mean = 6.05% Variance = ((11.2% -6.05%)^2 +(6.9% -6.05%)^2 +(5.4% -6.05%)^2+(5.3% -6.05%)^2 +(8.0% -6.05%)^ 2 +(7.6% 6.05%)^2 +(5.6% -6.05%)^2 +(5.1% -6.05%)^2 +(5.0% -6.05%)^2 +(6.2% -6.05%)^2 +(5.3% -6.05%)^2+ (4.8% -6.05%)^2 +(4.9% -6.05%)^2+(5.6% -6.05%)^2 +(5.7% -6.05%)^2 +(6.0% -6.05%)^2 +(6.8% -6.05%)^2+(7.6% -6.05%)^2 +(3.5% -6.05%)^2 +(4.4% -6.05% )^2) / 20 = 0.0277% Risk = √ (0.0277%) = 1.66% Risk of Portfolio ALPHA: E (R) or mean = 11.53% Variance = ((30.13% -11.53%)^2+(0.17% -11.53%)^2+(39.71% 11.53%)^2 +( -8.17% -11.53%)^2+(20.71% -11.53%)^2 +(13.03% -11.53%)^2 +(18.91% -11.53%)^2 +(16.44% -11.53%)^2 +( 14.27% -11.53%)^2 +(4.8% -11.53%)^2 +(6.65% - 11.53%)^2 +(-9.71% -11.53%)^2 +(12.01% -11.53%)^2 +(24.68% -11.53%)^2 +(19.54% -11.53%)^2 +(23.36% -11.53%)^2 +(11.44% -11.53%)^2 +( -38.66% -11.53%)^2 +(29.51% 11.53%)^2 +(1.99% -11.53% )^2 )/ 20 = 2.9829% Risk = √ (2.9829%) = 17.27% Risk of Portfolio BETA: E (R) or mean = 10.53% Variance = ((27.12% -10.53%)^2 +(4.33% 10.53%)^2 +(32.08% -10.53%)^2 +(-6.57% -10.53%)^2 +(17.47% -10.53%)^2+(13.76% -10.53%)^2 +(14.63% -10.53%)^2 +(12.89% -10.53%)^2 +(4.58% -10.53%)^2 +(10.38% -10.53%)^2 +(10.07% -10.53%)^2 +(2.94% -10.53%)^2+(9.9% -10.53%)^2 +(22.74% -10.53%)^2 +(13.93% -10.53%)^2 +(21.13% 10.53%)^2 +(5.73% -10.53%)^2 +(-27.89% -10.53%)^2+(18.72% -10.53%)^2 +(2.75% -10.53% )^2) / 20 = 1.6552% Risk = √ (1.6552%) = 12.87% Risk of Portfolio GAMMA: E (R) or mean = 7.44% Variance = ((17.03% -7.44%)^2 +(8.0% -7.44%)^2 +(13.61% -7.44%)^2 +(0.12% 7.44%)^2 +(12.12% -7.44%)^2 +(10.27% -7.44%)^2 +(10.52% -7.44%)^2 +(9.0% -7.44%)^2 +(1.14% -7.44%)^2 +(10.26%-7.44%)^2 +(7.22% -7.44%)^2 +(7.4% -7.44%)^2+(5.11% -7.44%)^2 +(11.3%-7.44%)^2 +(7.09% -7.44%)^2 +(10.73% -7.44%)^2 +(2.77% -7.44%)^2 +( -2.53% -7.44%)^2 +(3.84% -7.44%)^2 +(3.78% -7.44% )^2) / 20 = 0.2381% Risk = √ (0.2381%) = 4.88% References Abbott, G. (2008) Self Managed Superannuation Funds Strategy Guide. Australia: CCH Australia Ltd Publisher. Dixon, D. (2010) Superannuation: the costs and benefits. Pennsylvania: Brotherhood of St. Laurence Publisher. Taylor, L. A. (2005) Superannuation made easy. New Delhi: Pascal Press. Read More