Investment Analysis based on Financial Markets & Economic Principles

This report provides an analysis of financial markets and economic principles, focusing on investment strategies and portfolio construction. It examines various asset classes, including cash, fixed deposits, equity (using the All Ordinaries Index Fund as a benchmark), and real estate (using the A-R...Read More

Running head: FINANCIAL MARKETS AND ECONOMIC PRINCIPLES
Financial Market and Economic Principles
Name of the Student:
Name of the University:
Author’s Note:

Table of Contents
In Response to Question 1...............................................................................................................3
Reference.........................................................................................................................................6
Appendix..........................................................................................................................................7

In Response to Question 1
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 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%
Neutral
Neutral
Positive/Cyclical
Neutral/Cyclical
20% 35% 20% 25%
Low Low High Medium
Cash and Cash
Equivalents Fixed Deposit Equity/All-
Ordinaries Real Estate/A-REIT
0.00%
4.00%
8.00%
12.00%
16.00%
Return Delivered

Reference
Bajada, C., 2017. Australia's Cash Economy: A Troubling Issue for Policymakers: A Troubling
Issue for Policymakers. Routledge.
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.
Hoesli, M. and MacGregor, B.D., 2014. Property investment: principles and practice of portfolio
management. Routledge.
Jobst, C. and Stix, H., 2017. Doomed to Disappear? The surprising return of cash across time and
across countries.
Lekander, J.R., 2015. Real estate portfolio construction for a multi-asset portfolio. Journal of
Property Investment & Finance, 33(6), pp.548-573.
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.

Appendix
1) Cash
1-Month
Treasury
Returns
3-Month
Treasury
Returns
6-Month
Treasury
Returns
1-Year
Treasury
Returns
2-Year
Treasury
Returns
3-Year
Treasury
Returns
5-Year
Treasury
Returns
7-Year
Treasury
Returns
10-Year
Treasury
Returns
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Return on Cash Investment
Last 1 Month 3 Month 6 Month 1 Year
2) Fixed Deposits
Product Interest Rate Tenure Minimum Deposit Amount
Fixed Rate Deposit 2.75% 6 month Minimum Deposit Amount $5,000
Fixed Rate Deposit 2.65% 12 month Minimum Deposit Amount $10,000
Fixed Rate Deposit 2.80% 24 month Minimum Deposit Amount $5,000
Fixed Rate Deposit 3.00% 36 month Minimum Deposit Amount $50,000
6 month 12 month 24 month 36 month
0.024
0.026
0.028
0.03
Fixed Deposit Rate
Interest Rate Time

3) Equity Returns
Particulars %
Average Daily Return -0.47%
Variance 0.00065
Standard Deviation 0.025489
One Year Return 9.90%
(27 Sep 2018- 28 Sep 2017)
0
5000000000
10000000000
15000000000
20000000000
25000000000
30000000000
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Volume Return
4) Real Estate
Annualized Returns (%)
3MTH YTD 1 Year 3 Year 5 Year 10 Year
Total Returns
S&P/ASX 200 A-REIT
(Sector) (TR) 5.97 6.80 15.82 10.52 13.04 5.88
Price Returns
S&P/ASX 200 A-REIT
(Sector) 3.60 3.46 10.46 5.40 7.58 -0.04
Net Total Returns
S&P/ASX 200 A-REIT
(Sector) (NTR) 5.28 5.85 14.26 9.01 11.41 4.23
1 Day MTD QTD YTD
-2.00%
0.00%
2.00%
4.00%
6.00%
A-REIT (AUD)
Total Returns
S&P/ASX 200 A-REIT (Sector) (TR) Price Returns
S&P/ASX 200 A-REIT (Sector)
Net Total Returns
S&P/ASX 200 A-REIT (Sector) (NTR)