Investments and Portfolio Management | Assignment
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Added on 2020-03-16
Investments and Portfolio Management | Assignment
Added on 2020-03-16
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Investments andPortfolio Management[Type the abstract of the document here. The abstract is typically a short summary of the contentsof the document. Type the abstract of the document here. The abstract is typically a short summary of the contents of the document.]
Question 1a) Benchmark index is a group of stocks/securities which are used as benchmarks to compare the performance of stocks. These are also called the market index. The benchmark index for certain countries is given below:CountryBenchmark IndexAustraliaASX 200USADow JonesHong KongHang SengJapanNikkei IndexEnglandFTSE 100ChinaShanghai[ CITATION Tra171 \l 16393 ]b) There are various types of mutual funds options available to an investor. Each mutual fundhas its own differential features and advantages. The asset classes and the allocation of different assets for three mutual funds i.e. stable fund, balance fund and growth fund are discussed below:i) Stable – A stable fund is a fund for retirement plans. Under this fund, the main investment asset is wrapped bonds which is the guaranteed investment certificate (GICs), these GICs are paired with insurance policies to give a minimum yield on the principal amount invested and also to preserve the principal amount. The bonds of the fund can be short term and intermediate term.ii) Balance fund – A balance fund comprises of three asset classes which are stock, bond and money market. The differential feature of balance fund is that the mix of stocks and bonds does not change and remains constant as the minimum and maximum amount invested in each asset class is fixed. The fund can have higher equity component making the fund moderate or a higher bond component making the fund conservative. Balance fund is preferred by investors who are looking for safety, income and a modest capital appreciation.iii) Growth fund – A growth fund comprises of only stocks. The fund consists of a portfolio of diversified stocks. The primary goal of the fund is capital appreciation. The fund comprises of stocks of companies which have above average growth and these companies
mostly reinvest their earning for expansion and acquisitions. Growth funds can be large cap, mid cap and small cap. Question 2Interest elasticity is the sensitivity of the price of the fixed income securities to the interest rates. Higher interest elasticity means that with a small change in the interest rates, the prices of securities fluctuate by a higher amount. Duration of a fixed income security measures the average life of a bond. Duration provides an estimate of the sensitivity of the bond prices to the interest rates. Higher the duration, higher is the sensitivity of the interest rates to the bond prices and vice versa [ CITATION Bod16 \l 16393 ]. Like if the interest rate increases by 1%, and the duration of a bond is 5 years, the prices of bond will decline by 5%.Prices and duration of a bond or fixed income security are related from the point of view of interest rates. Price and interest rates have an inverse relationship. The sensitivity of price andinterest rate is measured by duration. Duration determines the change in price as a result of a change in interest rate. Question 3Face value (F) = $1000Market price (P) = $1000Coupon rate (C) = 10% paid semi annuallyMaturity (n) = 11 yearsa) Duration of the Treasury bond = present value of cash flows weighted by the length of time to receiving the cash and divided by the current selling price of the bond.For discounting the cash flows, the yield to maturity needs to be calculated to be used as discount rate.Yield to maturity = [(C+ (F-P))/n] / [F+P]/2 = [50 + (0/22)] / [2000/2] = 5%
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