Tutorial 1 Introduction
1. Discuss the following investments.
a. Term deposit
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Capital asset -> Stream of interest
Can value with an NPV
Very low risk
Fixed income asset class (not all fixed income is low risk)
b. Precious metals
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Gold, silver, platinum, palladium
‘Store of value’ - > Does not generate income, but might keep its value -> Safe haven
Type of commodity
Commodities typically have low correlation with stocks and bonds -> Diversification
benefits, inflation-protection
o BUT during COVID, commodities like gold have had high correlation with
stocks
c. Hedge funds
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Not a standalone asset class
Hedge funds have strategies where they might invest in a range of different asset
classes
Allocations to hedge in multi-asset class portfolios (super) typically grouped in
‘Alternatives’
d. SPDR S&P/ASX 200 ESG (Exchange traded fund, ASX: E200)
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ETF on the ASX
ETF’s are standalone asset classes, but they reflect or track the overall equity
exposure of a market -> Trade ETFs as if they were like equities
ETFs generally could cover other asset classes (beyond equities)
This ETF tracks ESG-screened companies
2. Does being risk averse mean only investing in risk-free assets?
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No
Being risk averse means the investor requires a risk premium in order to invest in
risky assets
Eg. Rf -> 4%, potentially a risk averse investor might require 4%+3%=7%
3. What is the difference between an investor’s ‘ability to take risk’ and their ‘willingness to
take risk’?
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Ability to take risk -> Determined by investor constraints and circumstances
o Time horizon
o Age
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o Wealth level
o Necessary living costs
o Dependants/children, etc
Willingness to take risk – Determined by an investor’s risk preferences
4. What is the main difference between defined contribution and defined benefit pension
funds?
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Pension fund – Funds that receive contributions from your employer/organisation,
they’re meant to secure enough money for you in your retirement
Defined benefit plan – Provides a pre-determined amount of retirement income based
on a formula
o Factors include total years worked with an employer, average salary level
Defined contribution plans – Determined by the total amount contributed to the fund
and the fund’s investment performance
5. In relation to mutual funds, what is meant by the term ‘open-end’? How does this differ
from a ‘closedend’ fund?
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Mutual fund – Pools money from many separate investors and then invests that
money as part of a portfolio
o Collect fees from the individual
o Fee is usually based on the size of the transaction/investment -> usually call
this the Management Expense Ratio (MER)
o Mutual funds can invest in a range of assets and follow various strategies
o Regulated
o Investors receive units (shares or unit shares) which are priced based on the
Net Asset Value (NAV) of the portfolio
Open end -> Can issue unlimited new units -> New investors come in or existing
investors seek to increase their stake
o New units are priced based on the NAV at the time of new issue
o Investors in an open end fund can exit their position at any time be redeeming
their units at the NAV from the fund manager
Closed end -> Can only issue a fixed number of units
o Often capital is raised through an IPO process
o In Australia, closed end funds are usually called Listed Investment Companies
(LICs)
o Lower liquidity, allows for investments with longer time horizons