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You are required to analyse the various suitable asset classes available, outlining the nature of each asset class recommended, the historical and expected performances of each asset class identified and the risks of each such asset class. You should prepare a summary of your recommendations for how much of the available funds (in percentage terms, to the nearer whole number) should be invested in each of your selected asset classes [cash, Australian fixed interest .

Australian equities, Australian property, overseas fixed interest, shares and / or property and alternative investments (if any – see chapter 18 of the text-book)]. State reasons for your choices and your estimates of the expected annual income and expected annual capital growth likely to be achieved from your recommended portfolio. Summarise the risks of your recommendations. 

“Illustrate your analysis, particularly performance history, with appropriate tables, charts and graphs, and where appropriate with illustrative examples.”

Description of Recommended Asset Classes

The Balanced Investment portfolio was constructed using the notional amount of $A1 billion, which was diversified with the preference of the investors. The type of investor studied for this type of fund is the moderate risk averse investors whose risk preference towards the assets is inclined by the amount of the return the assets class generates (Chow et al. 2014). The wide class of investment, which were considered for investing,

were the cash and cash equivalents, fixed deposits domestic, fixed deposits in overseas, equity investment, real estate and private equity were the type of assets class selected. The whole portfolio was viewed from the context of equity and debt investment. The assets class selected are risky and less risky and the weightage for the same has been allocated using the funds general principles and guidelines. The recommendation and the weightage for the same assets class was provided after reviewing the performance of the assets class and the risk clientele effect of the investors.

The risk and rewards of the investor towards the assets class was given in the recommendation section of the assignment. The return provided by the assets classes can be more than the required rate of return from the portfolio that is around 3%. The allocation of assets class was done accordingly to achieve the return target demanded. The assignment also kept several economic factors under consideration such as Inflation Rate, Country Risk, Sovereign Risk, International taxation and Currency price movement were some of the key external or economic factors considered while investment and making  the fund (Guerard, Markowitz and Xu 2015).

The diversification benefits would be one of the main advantage the balance fund will provide in term of assets class to the investors. The balanced fund is a blend of different assets class that has different characteristics.  The beta of the assets class selected ranges from 0 to 1. The benefits of the fund will be in term of exposures to the short-term funds and deposits in the form of the cash and cash equivalents. While the exposure to assets class such as the equity class will provide the investors with the exposure to the capital market.

The empirical evidence for the balanced fund shows that the consistency in the form of returns to the investors in the volatile economy and macro-economic conditions. The balanced fund has proven to provide a sustainable and better economically efficient returns form the equity-oriented returns where the exposure and volatility to the economy and market is generally high. The risk and reward for the same is high and the beta for such assets class is generally is high (Ackert, Church and Qi 2015). The risk hierarchy among the assets class is
defined below:

The difference of risk preference and the difference or risk and return preference among the investors make them the suitable investors according to their assets class. For the reason there, reason of varied risk and rewards preference the investor can select the fund like the Balanced Fund, which is less risky or the Equity Fund, which is risky. The percentage of asset allocation or the weights to each assets class in this type of fund are given according to the type of fund (Liagkouras and Metaxiotis 2015).

Balanced Fund

Asset Class

Risk Associated

% of Assets Invested

Cash and Cash Equivalents

Low

10%

 Fixed Deposits Domestic

Low

45%

Equity Class

Medium

20%

Real Estate/Assets

High

15%

Overseas Fixed Deposits

Medium

5%

Private Equity

High

5%

Total

100%

Allocation Recommendations and Rationale

Table 1: Balanced Fund Overview

 

Cash and Cash investments are the short-term investments that is composed of investments in treasury bills and short-term treasury bonds and commercial papers, the short-term investments provide an edge to the fund in terms of cash requirement of the fund (He, Krishnamurthy and Milbradt 2016). Such assets class meets the operating activities and the daily requirement of small amount of redemption of funds.

The empirical evidence for the same suggest that the return on this type of assets class comprises of return from 1 month, 3 month, and 6 month of treasury bills and bonds. The asset class has provided returns like 2.02% in one-month period, while the return in three-month period was around 2.16% and returns in six-month trend period was around 2.33%, while the return in one year treasury bonds and bills was around 2.56% return (Bessembinder 2018).

 

The fixed deposit investment is the asset class where the funds are deposited on a fixed rate basis. The Australian fixed rate deposits provides the best suitable assets class for the balanced fund because of the low risk and secured investment return feature, The return from such an assets class is best suited and the weightage for the same in the fund is given at a considerable amount. The considerable amount of fund invested in the asset class was around 45% of the total assets under management. The fixed deposits can provide sustainable and consistent return to the balanced fund (Goodfriend 2016 August).

Product

Interest Rate

Time

Minimum deposit

Fixed Deposit

2.75%

6 month

Minimum deposit $5,000

Fixed Deposit

2.65%

12 month

Minimum deposit $10,000

Fixed Deposit

2.80%

24 month

Minimum deposit $5,000

Fixed Deposit

3.00%

36 month

Minimum deposit $50,000

The Equity is the other class of investment for the balanced fund investment where the funds are invested primarily into stocks and equity related products and services. The equity class of investment involves taking exposure into stocks and mutual funds or in Index funds. The risk for such kind of asset investment is generally higher and the beta for such kind of investment is high (Gao, Parsons and Shen 2017).

The equity can be the best addition and one of the best possible choice for the balanced portfolio investor because of the risk and reward characteristics involved in the same . The net return on equity investment suggests from the empirical evidence that a return of around 13% was delivered from this particular asset from the trend period 2016-2018. The equity asset class should be given a weightage of around 20% as the risk and reward for the assets class would signify the same (Amaya et al. 2015).

The real asset was the another asset class selected for the portfolio, the real asset provides a wide class of investment array to the investors of the balanced fund with the choice to invest in the commercial and residential property of the Australian economy. The asset class provides and equitable exposure to the economy and to the wide range of the real assets products of the economy. The real assets has been selected in the fund because of the risk and reward characteristics the extra risk and reward feature provides the investor with equitable risk and reward exposure .

Expected Performance and Risk

(Moss 2018). The real estate return for the period has been very volatile with the asset class showing dispersion in the form of returns. The weight given to such an asset class was around 15%, which will though provide a cyclical return to the fund and will give out the best possible return in the boom period of the economy. The following table shows the historical trend on the basis of percentage return in comparison to the old return, new return for the period and the
estimate for the same by the analyst expectations (Ortiz-Molina and Phillips, 2014).

Calendar

Particulars

Old

New

Estimate

Analysis

3/20/2018

Housing Index YoY

0.05

0.083

6/19/2018

Housing  Index YoY

0.02

0.05

0.017

6/19/2018

Housing  Index QoQ

-0.007

0.01

-0.01

0.018

9/18/2018

Housing  Index QoQ

-0.007

-0.07

0.011

9/18/2018

Housing  Index YoY

0.02

-0.007

12/12/2018

Housing  Index QoQ

0.012

The Overseas Fixed Deposit Rate is done by investing in countries, which are having better opportunity of funds investing in a particular fixed scheme presented by different country. The main advantages is such type of investment in the asset class is the global exposure of investments in an around via different factors like the macro economic conditions of the country. The main type of problems associated with such class of investment is that the assets suffers from country or sovereign risks and global currency fluctuations, which are observed on a global scale (Du and Schreger 2016).

The weightage given to the asset class was around 5% as these deposits can prove out to be at times risky for the investors where consistency between risk and return is not observed. Empirical evidence suggests that although the global fixed deposit rates and returns are stable for fixed deposit type or class of the investment but the wide range of volatility in the currency may expose the investors of the fund with additional macroeconomic and country wide risk that would not be risk return trade off in that case (Ong 2018).

The Alternative investment is a new conceit of investment where the traditional assets classes such as Equity and Bonds have been looked off and a new class of investment like private equity fund, commodities, hedge funds and others are some of the examples of the alternative source of investment that the fund manager can select for investment (Jurek and Stafford 2015). The Private Equity fund, which has been selected as the asset class for our investments into alternative investment as this type of investment, has the potential to deliver better output and returns which are way exceptionally beyond the concept of what equity and bond investment could fetch.

The empirical evidence for the same suggests that these type of funds often provide highly volatile returns as the nature of investments are into startups and new capital ventures where risk is high (Platanakis, Sakkas and Sutcliffe 2018).

The overall recommendation and an overview of the balanced fund shows that the return will be generated in the balanced funds in the forms of interest and dividend as a source of current income while capital growth will be seen in the form of growth of investment. The expected annual income will be generated from sources of funds like cash or short-term investments or fixed deposits and from equities in the form of dividends. The capital growth will be seen from investment into real estate and private equity funds.

Balanced Fund

Class ofAsset

 Invested Finance

% of Assets Deployed

Cash and Cash Equivalents

100,000,000

10%

 Fixed Deposits Domestic

450,000,000

45%

Equity Class

200,000,000

20%

Real Estate/Assets

150,000,000

15%

Overseas Fixed Deposits

50,000,000

5%

Private Equity

50,000,000

5%

Total

1,000,000,000

100%

Balanced Fund

Asset Class

Risk Associated

% of Assets Invested

Cash and Cash Equivalents

Low

10%

 Fixed Deposits Domestic

Low

45%

Equity Class

Medium

20%

Real Estate/Assets

High

15%

Overseas Fixed Deposits

Medium

5%

Private Equity

High

5%

Total

100%

Illustrative Examples

Table 4: Balanced Fund Overview

There are certain recommendations, which should be kept in view before investment into assets class. The funds should be reviewed annually and certain investment strategies like the technical analysis and fundamental analysis of the stocks should be done in order to review and asses the performance of the fund (Gailly 2018). If there is huge, volatility and dispersions noted in the fund behavior then the same should be noted and reported to make necessary steps (DeMiguel et al. 2016).

Finally, the Balanced Fund Portfolio with a notional amount of $A 1 Billion dollars can show a return which is more than the 3% p.a. required benchmark if the assets are marked and weighed according to the weights mentioned. The fund is invested with a wide array of assets class suitable for investor that are risk averse and those who avoid risk in the due course of their investment.

The wide class of investment, which were considered for investing, was the cash and cash equivalents, fixed deposits domestic, fixed deposits in overseas, equity investment, real estate and private equity were the type of assets class selected. A detailed analysis performed for the assets class invested via the historical trend the asset class has helped us to determine the particular asset class. A recommendation for the same was provided for the amount to be invested in each class of assets and the exposure and the amount of return the assets can generate. 

Reference

Ackert, L.F., Church, B.K. and Qi, L., 2015. An experimental examination of portfolio choice. Review of Finance, 20(4), pp.1427-1447.

Amaya, D., Christoffersen, P., Jacobs, K. and Vasquez, A., 2015. Does realized skewness predict the cross-section of equity returns?. Journal of Financial Economics, 118(1), pp.135-167.

Bessembinder, H., 2018. Do stocks outperform treasury bills?. Journal of Financial Economics.

Chow, T.M., Hsu, J.C., Kuo, L.L. and Li, F., 2014. A study of low-volatility portfolio construction methods. Journal of Portfolio Management, 40(4), pp.89-105.

DeMiguel, V., Mart?n-Utrera, A., Nogales, F.J. and Uppal, R., 2016. Fifty Ways to Beat the Market? A Portfolio Perspective on Investment Anomalies.

Du, W. and Schreger, J., 2016. Sovereign risk, currency risk, and corporate balance sheets.

Gailly, B., 2018. Develop a Balanced Portfolio of Business Models. In Navigating Innovation (pp. 147-194). Palgrave Macmillan, Cham.

Gao, P., Parsons, C.A. and Shen, J., 2017. Global Relation between Financial Distress and Equity Returns. The Review of Financial Studies, 31(1), pp.239-277.

Goodfriend, M., 2016, August. The case for unencumbering interest rate policy at the zero bound. In Federal Reserve Bank of Kansas City’s 40th Economic Policy Symposium. Jackson Hole, WY. August (Vol. 26).

Guerard Jr, J.B., Markowitz, H. and Xu, G., 2015. Earnings forecasting in a global stock selection model and efficient portfolio construction and management. International Journal of Forecasting, 31(2), pp.550-560.

He, Z., Krishnamurthy, A. and Milbradt, K., 2016. What makes US government bonds safe assets?. American Economic Review, 106(5), pp.519-23.

Jurek, J.W. and Stafford, E., 2015. The cost of capital for alternative investments. The Journal of Finance, 70(5), pp.2185-2226.

Liagkouras, K. and Metaxiotis, K., 2015. Efficient portfolio construction with the use of multiobjective evolutionary algorithms: Best practices and performance metrics. International Journal of Information Technology & Decision Making, 14(03), pp.535-564.

Moss, A., 2018. The use of listed real estate in Real Asset Funds (No. eres2018_301). European Real Estate Society (ERES).

Ong, H.B., 2018. Banking on foreign currency accounts: evidence from Malaysia. International Journal of Bank Marketing.

Ortiz-Molina, H. and Phillips, G.M., 2014. Real asset illiquidity and the cost of capital. Journal of Financial and Quantitative Analysis, 49(1), pp.1-32.

Platanakis, E., Sakkas, A. and Sutcliffe, C., 2018. Harmful diversification: Evidence from alternative investments. The British Accounting Review.

Reserve Bank of Australia. (2018). Historical Data | RBA. 

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