Activity 1 You are approached by a large pension fund with assets of $50bn who currently have a very traditional (though global) asset allocation, which is 60% equities and 40% fixed income. They...

1 answer below »

Activity 1


You are approached by a large pension fund with assets of $50bn who currently have a very traditional (though global) asset allocation, which is 60% equities and 40% fixed income. They employ a mix of active and passive investments using the MSCI World Equity and FTSE World Govt Bond indices as their benchmark. Their long run mean return has been 7.1% per annum with 8.8% annualised volatility and a maximum drawdown of 32% which occurred between October 2007 and February 2009.


The pension fund is considering adding alternatives to their portfolio and ask you to give a presentation to the trustees who are a mixture of investment experts and members of the fund with a less technical background.


Using what you have learned during this course, prepare a PowerPoint presentation with amaximum of 20 slidesoutlining what you think that pension fund should do, highlighting both the opportunities and the risks.



As you are going to be graded on the contents of the slide deck and will not have the opportunity to make the presentation yourself you can add commentary in the ‘notes’ section under each slide if you think it is necessary to clarify points made on the slides.



Use the spreadsheetReturn Data For Assignment.xls,which contains the return data for all of the asset classes we have covered to save you having to gather any data.



(50 marks)



Activity 2 (maximum 1,000 words)


One of the features that distinguishes alternative investments from traditional investments is the compensation structure. While traditional investment vehicles generally only charge a management fee, it is common for alternative investments such as hedge funds, private equity and venture capital to also charge an incentive fee.


a.Describe the mechanics of incentive fees and the explain the rationale for this alternative compensation structure.


b.How do incentive fees influence the behaviour of the manager and do they lead to any agency issues?


c.If the answer above is ‘yes’ then how can these agency issues be resolved



(25 marks)



Activity 3 (maximum 1,000 words)


Traditional mean/variance measures such as the Sharpe ratio show that for the period 1994-2020 the risk adjusted performance of most alternative investments is superior to traditional investments.


However, it can be argued that this approach seriously understates the risk of alternative investments, why is this the case?



(25 marks)


Answered 6 days AfterMay 02, 2022

Answer To: Activity 1 You are approached by a large pension fund with assets of $50bn who currently have a very...

Himanshu answered on May 06 2022
93 Votes
PowerPoint Presentation
Introduction
Gone are the days when people use to only rely on their savings for future security. In today's world, savings may not be adequate to ensure financial safety. Idle money kept in your savings bank account or locker may also not serve the purpose.
That is because of two reasons – one, the idle cash in your bank account is an opportunity loss as it is not capable of earning more money, and
Second, it does not have the potential to beat inflation.
People no longer rely only on their money for long-term stability. Savings may not be enough to provide financial security in to
day's environment. Idle money in your savings account or locker may also be in effective. This is due to two factors: first, the idle cash in your bank account represents an opportunity cost because it is not capable of producing additional money, and second, it does not have the ability to outperform inflation.
2
Importance of Investment
Investing ensures present and future financial security. It allows you to grow your wealth and at the same time generate inflation-beating returns. You also benefit from the power of compounding.
Furthermore, investments have the potential to meet your financial goals, such as purchasing a house, accumulating retirement corpus, and building an emergency fund, among others.
Investing instils a sense of financial discipline as you develop a habit of setting aside a particular amount every month or every year towards your investments.
Some investment vehicles like Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), National Pension System (NPS), etc., help to minimise your tax liability.
Investing gives financial stability in the present and future. It helps you to build wealth while still generating inflation-beating returns. Compounding is also advantageous to you.Furthermore, investing may help you achieve your financial objectives, such as acquiring a home, developing a retirement fund, and establishing an emergency fund, among others.Investing inculcates financial responsibility by establishing a habit of putting away a specific amount each month or year for your holdings.Some investment vehicles, including as the Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), National Pension System (NPS), and others, can help you reduce your tax burden.
3
Diversification    
Diversification is a technique that reduces risk by allocating investments across various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event.
Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk. Here, we look at why this is true and how to accomplish diversification in your portfolio.
Diversification is a risk-reduction strategy that spreads investments over a variety of financial instruments, sectors, and other categories. Its goal is to maximise profits by investing in many sectors that will react differently to the same occurrence.Although diversity does not guarantee against loss, most investing professionals believe that it is the most crucial component of achieving long-term financial goals while limiting risk. We'll look at why this is true and how to diversify your portfolio in this article.
4
For Instance
Let's say you have a portfolio that only has airline stocks. Share prices will drop following any bad news, such as an indefinite pilot strike that will ultimately cancel flights. This means your portfolio will experience a noticeable drop in value.
You can counterbalance these stocks with a few railway stocks, so only part of your portfolio will be affected. In fact, there is a very good chance that these stock prices will rise, as passengers look for alternative modes of transportation.
You could diversify even further because of the risks associated with these companies. That's because anything that affects travel will hurt both industries. Statisticians may say that rail and air stocks have a strong correlation. This means you should diversify across the board—different industries as well as different types of companies. The more uncorrelated your stocks are, the better.
Let's imagine you just have airline equities in your portfolio. Any negative news, such as an indefinite pilot strike that would result in flight cancellations, may cause stock values to fall. This indicates that the value of your portfolio will decrease significantly.You may offset these equities with a few railway stocks, affecting only a portion of your portfolio. In fact, when passengers seek alternate forms of transportation, there is a significant likelihood that stock prices will climb.Because of the risks involved with these firms, you may diversify even further. Because anything that has an impact on travel would harm both sectors. Rail and air stocks may have a high link, according to statisticians.
5
Diversification Explained
A diversified investment portfolio includes different asset classes such as stocks, bonds, and other securities.
But that's not all. These vehicles are diversified by purchasing shares in different companies, asset classes, and industries.
For instance, a diversified investor's portfolio may include stocks consisting of retail, transport, and consumer staple companies, as well as bonds—both corporate- and government-issued. Further diversification may include money market accounts and cash.
Different asset types, such as stocks, bonds, and other assets, are included in a diversified investment portfolio.That's not all, though. By acquiring shares in several firms, asset classes, and industries, these vehicles are diversified.A diverse investor's portfolio, for example, may contain equities from retail, transportation, and consumer staples firms, as well as corporate and government bonds. Money market accounts and cash can be used to diversify further.
6
Financial Analysis    
As per the above analysis we can say that new method that we have choose have gained good...
SOLUTION.PDF

Answer To This Question Is Available To Download

Related Questions & Answers

More Questions »

Submit New Assignment

Copy and Paste Your Assignment Here