代写 BUSM4160 Managerial Finance

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代写 BUSM4160 Managerial Finance

BUSM4160   13 April 2016

Mini-Assignment 3

Managerial Finance

BUSM4160

Mini Assignment 3: Risk and Return

Instructions

Due: 27 April mid-night.

Submission process: Upload to Turnitin

Referencing: Harvard Style – Please cite all your sources.

Words: 750 (excluding cover page & references)

Topic

Volatility within global share markets has increased significantly since mid 2015.

Commentators believe this is being driven by a slowdown in growth in China and

other emerging markets; the increase in US interest rates, and the continued

slowdown in commodity markets.

Figure :1 Graphic represents the volatility of the global equity market, as measured by the MSCI All Country

World Index (in AUD) over the past 10 years, on a rolling 90-day basis.

You are one of the investment advisers to a high net wealth family group that is

concerned about the current market volatility and how it will effect their equity

investments.

You are asked to prepare a business brief that responds to the following:

1) Define what we mean by “volatility” in financial markets, and what it means

for investors when volatility increases. How would an economic slowdown in

China, a rise in US interest rates and a slowdown in commodity prices create

volatility?

BUSM4160   13 April 2016

Mini-Assignment 3

2) Explain Figure 1: What does the MSCI graphic tell us about recent market

volatility? Are the concerns about increasing volatility justified?

3) At the last investment committee meeting one of the brokers has advised

your client not to invest in oil shares because they have a high standard

deviation. Do you agree with the broker’s statement and is this sound advice

for a risk-averse investor? Why or why not?

4) Given the current situation what would your exposure recommendation be if

your clients wish to reduce their risk exposure? (This should be your

conclusion).

Some pointers (not conclusive):

1) Discussion should include:

• Greater uncertainty; which means share value could increase as well as

decrease…higher risk, higher return…. just moving down doesn’t mean

everyone is a loser, think of the big short.

• Re: How would an economic slowdown in China, a rise in US interest rates

and a slowdown in commodity prices would create volatility? > It increases

uncertainty

2) Re explain figure 1:

• Volatility is below the long-term average if we adjust for the GFC, then it

may be higher, because that period was extreme…

3) Re standard deviation & investing in ‘risky’ oil stocks discussion of some of

the following:

• The standard deviation of a security is a measure of how ‘risky’ the

security is: the higher the standard deviation, the higher the risk;

• From the standpoint of a risk adverse investor, the broker is actually

providing sound advice when looking at the oil industry stocks in

isolation;

• High standard deviation of the oil industry stocks implies greater risk and

a risk adverse investor dislikes risk;

• However, when the oil industry stock is looked at in the context of a

diversified portfolio, then that risk can substantially be reduced;

• Diversification can substantially reduce the variability of returns without

an equivalent reduction in expected returns: reduction in risk arises

because worse than expected returns from one asset e.g. the oil industry

stocks are offset by better than expected returns from another.

•  Not all risk can be diversified away (systematic portion of the risk), and

this risk affects the large number of assets …

BUSM4160   13 April 2016

Mini-Assignment 3

代写 BUSM4160 Managerial Finance

4) This should be a conclusion based on above discussion and could advocate

for some of the following (depending on what was argued before and what

evidence/ sources were presented):

• If you believe the case for investing in global equities is till a good

portfolio diversification strategy, then it makes sense to stay the course

and perhaps even top up exposure to global equities;

• Also: It is rarely a good idea to sell growth assets after the volatility (share

price declines) has already occurred;

• Equity markets do recover and environments of heightened risk aversion

often present good opportunities to top up exposure to that asset classes;

• Buying equities at the height of the GFC or during other bear market

periods proved to be a great entry point into equities.

代写 BUSM4160 Managerial Finance