Reference no: EM133804936

Assessment Description

Finance

The time value of money, and present value and future value calculations.
Risk and return.
Shares and share valuation.
Bonds and bond pricing.

Assessment Instructions
Assessment 1 consists of two activities: Activity 1 is a group case study and Activity 2 is an individual test.

Activity 1: Group Case Study

You must form groups of 4 to 5 members before Week 6.
You will then complete the case study questions in your group, but only one group member needs to submit the final answers (for the entire group).
All questions for the group case study are based on the article on the following page.
The group case study will be marked out of 10 and is worth 5% of your final mark for the subject.
All group members will get the same mark.
The group case study is an open book, but AI prohibited assessment. This means you can only use learning materials obtained from the FINM4000 subject portal.

Activity 2: Individual Test

The individual test will take place after the group case study. The test will consist of short answer questions and multiple choice questions.
One of the short answer questions is based on the article on the following page.
The individual test will be marked out of 40 and is worth 20% of your final mark for the subject.
The individual test is an open book, but AI prohibited assessment. This means you can only use learning materials obtained from the FINM4000 subject portal.

Choosing investments with the potential to earn high returns sounds like a no-brainer, until you consider the risks.

All investments carry risk. Deciding on the level and type of risk you're comfortable with is one of the fundamental steps to ensuring your super is working hard to produce the returns you need to fund your retirement, while also giving you the confidence to stick with your strategy through varying market conditions.

You might already have an idea of your personal tolerance for risk but perhaps you're not entirely sure of where your partner sits on the risk spectrum. Either way, it's a good idea to get a clear understanding of your individual and/or combined risk appetite and how that fits in with the range of investment options available when it comes to your super.
Re-thinking risk
The first step to understanding your risk profile and taking control of your investment choice is to carefully consider the risks you are exposed to.

Investment risk is often described as a simple spectrum, with stable assets like cash and fixed interest carrying less risk, and more volatile assets like property and shares carrying more. This picture is accurate when you're thinking about the risk of short-term loss, but the trade-off is that the more volatile assets provide a higher return in the long term.

When making investment decisions it is critical to consider the whole picture. If you invested solely in ‘secure' assets you would be very unlikely to suffer significant investment losses, but your investment would grow slowly. This increases the risk that your assets will not grow quickly enough to keep up with inflation (known as inflation risk) and the chance that your assets will not be sufficient to last for life after retirement (longevity risk). Real experts, zero AI-Get authentic assignment help!

On the other hand, if you invested solely in shares, property and alternative investments, your portfolio would have a high chance of losing value in any one year, but the expected return after a long period would be significantly higher. Both inflation risk and longevity risk would be lower than a ‘secure' portfolio.

Particularly when it comes to super, the risk that your balance doesn't grow enough can be more important than the risk of making a loss in the short term. Super is, by nature, a long-term investment - for most of us it's locked away until at least age 60 and then expected to provide income for life after retirement.

Because of the influence of time, the type of risk you're happy to accept for your super may be very different from other investments.

For example, if you want to save a deposit to purchase a home in four years' time, you're probably not willing to risk an investment loss that may take years to recover from. However, if you're considering super that you're not planning to access for another 20 years, a loss this year is less important. You may be more than happy to accept that risk in exchange for a higher return in the long run, knowing your balance has time to recover losses and go on to reach new highs.

Risk profile quiz
We've put the following quiz together to help you understand your risk profile (choose the answer most appropriate to your situation). We'd like to point out that we're not academics or psychologists, but we hope this quick questionnaire will help you clarify what kind of investments you're comfortable with.

Remember that your answers to the questions could be different when you're thinking about different investments. You could try the quiz when thinking about your super and then take it again when thinking about investing outside super to see if your attitude to risk varies.

Which of the following statements best summarises your objective?
Achieving a stable, predictable return is my highest priority Real experts, zero AI-Get authentic assignment help!
I prefer predictable returns, but I am OK with some fluctuations if my balance will grow faster
Investment growth is more important than stability
My first priority is high returns, even if they fluctuate significantly, including negative years
How important is it to you that your investment keeps pace with inflation (i.e. retains its purchasing power)?
Not important - I would keep it under the mattress if I could
Slightly important - just keeping pace is OK
Fairly important - I'd like my return to beat inflation and generate some growth in purchasing power
Critical - my priority is to grow my savings significantly more than inflation

How long would you be prepared to wait for your investment to return to its original value after making an investment loss?
No time at all. I can't tolerate a loss
1 year. A short-term loss is ok
3 years
5 or more years

How do you plan to use your super after retirement? (for super only)
Take a lump sum to repay debts or spend immediately
Spend it within 5 years
Spend most of it within 15 years
Draw on it evenly throughout retirement

How much would you be prepared to lose in a market downturn?
Nothing
3% of my investment
7% of my investment
10% or more of my investment

Would you consider borrowing to invest?
No
Maybe
It depends on the investment
Definitely yes

How often could you live with your portfolio having a negative year?
Never

Once every 15 years
Once every 8 years
Once every 5 years

How long are you investing for?
Five years
10 years
15 years
20 years or more

What would you do with a $20,000 windfall?
Keep it in a term deposit
Split it between a savings account and an ASX 200 index fund
Invest it in a diversified equity portfolio
Invest it in some interesting alternative assets with a high-return profile
If your investment fell in value by 20% what would you do?
Switch my whole balance to cash
Move some of my investment into more stable assets
Do nothing and expect the investment to recover
Invest more money to take advantage of low asset prices

Defensive
If you chose mostly A, then you are very concerned by any prospect of losing money. This is an important consideration when choosing your investment profile and knowing this will help you steer away from investments that make you nervous.

Mostly B - Conservative
You're more comfortable with risk but still don't want to take on too much, regardless of the potential return. A conservative risk profile means you are focused on preserving the value of your investments and existing investment income.

Mostly C - Moderate
You are looking for the higher returns that a higher risk profile will deliver. You are comfortable with a year of negative returns here and there as you know that you will be able to recoup your losses over future years.

Mostly D - Aggressive
You prefer to invest in assets that have a higher risk as there is a higher chance of return. You can tolerate big falls in your investments because you understand that with the risk levels you are comfortable with, you will be able to recoup your losses (and then some) over the longer term.

Investment profiles
Whether you have an SMSF or are in a retail, corporate or industry super fund, you will need to decide on an investment profile. For SMSFs this will be included in your investment strategy, but if you invest via a larger fund, you will have a range of investing options available to you.

Super funds now provide a vast range of options to members - some funds even offer the option of investing directly in shares and term deposits - but they will also include at least five or six pre- mixed investment options. These options are generally defined by their allocation to growth assets and defensive assets. Equities (shares), commodities and private equity are considered growth assets. Cash and fixed interest (bonds) are considered traditional defensive assets. Property and infrastructure have both growth and income-generating properties, which leads them to being classified as mixed growth/defensive assets. Property and infrastructure can also be held in physical form or as listed securities, which have different risk profiles.

The following table is a rough guide to the kinds of investment profiles that you will be able to choose from, starting with the most aggressive risk profiles, tapering down to the most defensive.

Knowing your risk profile is very useful when it comes to selecting the most appropriate investment option for your super. Selecting an option closely aligned to your risk profile means you are more likely to feel comfortable with how your super is invested and less likely to panic during the normal market ups and downs.