HA1022 Principles of Financial Markets Assignments solution

HA1022 Principles of Financial Markets Assignments solution

HA1022 Principles of Financial Markets Assignments solution

Introduction

Financial Assets are such that provides a wide variety of exposure to the investors in terms of diversity in portfolio investments. Financial Asset have different risk and reward characteristics and feature according to the type of the asset class (Hoesli and MacGregor 2014). The investible fund or the amount, which needs to be invested in various kind of asset should match the risk and reward preference of the investor. The investible asset class in the portfolio should be looked upon as the criteria where the portfolio investment will be redistributed among asset class like Cash, Fixed Interest, Equity and Real Estate (Jobst and Stix 2017).

The asset class investment should be done in accordance to the outlook of the market and the preference of the investor. Liquidity may be the first concern from the investor viewpoint which should be taken into account before portfolio investment (Bajada 2017). Market Outlook factors like the macro economic outlook, fundamentals of the company and interest rate volatility are some of the external factor that should be considered. Cash Investment which are short term type is the first assets class to be discussed where the outlook for this type of asset class the return will be generated for the portfolio from cash investment in liquid assets like treasury bills, short-treasury bonds and return from cash saving deposits (Appendix 1). The correlation of this asset class with other type of asset class and market is negative as the return on such investment is not affected and stays stable (Harris, Nassios and Giesecke 2017). The return expected from this type of asset class is around 1.28% p.a (Appendix 1). The Fixed Deposit investment is the other type of asset class for investment were the return will be generated from the funds in the form of deposits done. Banks are usually a common and popular service provider for such kind of investments. Liquidity in these asset class is defined to the period of investment done. The return from such kind of asset class is around 2.65%p.a on a minimum deposit of $10,000(Appendix 2). The outlook for such an asset class would be considered neutral and non-volatile as the interest rate the key component is stable and sustainable. The correlation of this asset class with other type of asset class is generally low and the return on the asset class is generally determined with the prevailing interest rate in the market (Mackaya and Haque 2016). Equity Investment is the other asset class considered for the portfolio investment the asset class provides a direct exposure to the Australian Stock Exchange or Capital Market. The asset class will provide return based on the performance of the stocks (Appendix 3). The benchmark considered for the equity asset class was the All Ordinaries Index Fund where the benchmark has given an return of about 9.9% in the trend period taken. Given the fact that the asset class is volatile and cyclical to the macroeconomic factor of the Australia Country and the business functions and operation that governs them. The Outlook for such an asset class is considered positive as the asset class in the three year of time frame has provided about 23.6% in the three year time frame. The correlation of this asset class with real estate and interest rate is positive as there is a direct influence on the returns of equity if there is a change in the interest rate and in real estate returns. The Real Estate is the other type of asset class where the investible fund could be invested on the basis of direct capital investment into real estate or through Real Estate Investment Trust which invests into assets on the basis of operating real estate structure assets are given on lease here and the rentals is the key operating income here. The real estate benchmark selected was the A-REIT Index that has delivered a return of about 14.26 %( Appendix 4). The outlook for the assets class is considered to be neutral and the correlation of the asset class is slightly high from fixed interest rate in the economy (Lekander 2015).

The Portfolio Structure for the investable amount and the historical returns were the key factors taken as the base amount for return evaluation and forecasting based on macroeconomic outlook and the characteristic of asset class.

Portfolio Investment

Asset Category

Correlation

% of Total Assets

Return Outlook

Return Delivered

Cash and Cash Equivalents

Low

20%

Neutral

1.28%

Fixed Deposit

Low

35%

Neutral

2.65%

Equity/All-Ordinaries

High

20%

Positive/Cyclical

9.90%

Real Estate/A-REIT

Medium

25%

Neutral/Cyclical

14.26%

Reference

1.Bajada, C., 2017. Australia's Cash Economy: A Troubling Issue for Policymakers: A Troubling Issue for Policymakers. Routledge.
2.Harris, J.N., Nassios, J. and Giesecke, J., 2017. Determining agent-specific rates of return in a Financial CGE model of Australia. Centre of Policy Studies, Victoria University.
3.Hoesli, M. and MacGregor, B.D., 2014. Property investment: principles and practice of portfolio project management. Routledge.
4.Jobst, C. and Stix, H., 2017. Doomed to Disappear? The surprising return of cash across time and across countries.
5.Lekander, J.R., 2015. Real estate portfolio construction for a multi-asset portfolio. Journal of Property Investment & Finance, 33(6), pp.548-573.
6.Mackaya, W. and Haque, T., 2016. A study of industry cost of equity in Australia using the Fama and French 5 Factor model and the Capital Asset Pricing Model (CAPM): A pitch. Accounting and Management Information Systems, 15(3), p.618.