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FNCE30001 Investments Unimelb Assignment Answer

This is the assignment sample of “FNCE30001 Investments Unimelb”

This course will teach you about investing and how to be the next Warren Buffett. You’ll learn about financial concepts, like how your money is invested. You’ll also learn investment strategies that can help a country improve its finances.

And you will learn different ways of measuring risk so when it comes time to make an important decision like whether or not to invest in stocks versus bonds, you have some idea of what could happen depending on which option works out better.

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Assignment Solution Of FNCE30001 Investments Unimelb

Assignment Task 1. Discuss core concepts in finance, including risk, return, risk premium, and risk aversion;

Core concepts in finance include risk, fraud, and the efficient market hypothesis. Risk can be measured by various potential loss or reward scenarios such as positive enhancements and negative impacts on profitability.

Fraud is a deliberate misrepresentation of financial information, while the success of efficient markets requires an unbiased asset pricing model.

Investor caution is advised because core concepts do not automatically imply total security from losses; rather, risks should simply be fully understood to manage these outcomes appropriately.

A core concept of finance is a return. When we buy an asset, it’s the potential for a good return that drives this purchase decision, since all other assets can theoretically be sold in order to generate cash. In terms of investing in shares, there are three common ways investors measure returns:

1) Share price

2) Cash dividends (should not include EPS)

3) Dividend yield (cash dividends divided by share price).

The major advantage of the share price over dividend yields or dividend income is the ability to create instant wealth through stock appreciation when coupled with leverage.

With this desired outcome in mind, disciplined risk management and realistic expectations should always be maintained because investing isn’t gambling- it’s just business.

Core concept risk premium is the generalization of what an economy might experience when its assets do not provide them with a fair return.

Risk reward is measured on a scale from lowest to highest, and this may correspond to levels in financial security and well-being. One goes through core concepts at their own pace without external guidance, because learning is self-perpetuated.

Development along different dimensions can be seen as independent transformations towards progressively higher levels of understanding of reality (i.e., “development”).

Risk aversion can be defined as the subjective risk associated with uncertainty and risk-like feelings that are attached to a given investment. There is always an element of the financial risk involved when making any type of investment.

Risk tolerance is the maximum amount of financial risk that will not cause emotional turmoil in an investor, or if there is so much risk for them they feel they could go into bankruptcy and worst-case scenario lose everything they have.

Risk aversion that makes people less likely to invest in anything with uncertain outcomes shows their preference for more security than potential gain.

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Assignment Activity 2. Analyze the portfolio selection problem, with emphasis on the mean-variance framework;

The mean-variance framework is a portfolio selection methodology that seeks the optimal tradeoff between expected return, which is the average of all possible outcomes for an investment, and variance, which measures how different the potential outcomes are around this expectation.

The mean-variance problem can be expressed in one equation as follows:

where xi represents the expected rate of return on security “i”, σ² represents the standard deviation of returns on security “i”, and β is a measure of relative risk aversion or aversion to investing capital in high volatility securities.

As usual in finance, σ² ≠ σ since it only measures upside (positive) or downside (negative) deviations from expectations. In order to avoid underinvesting or overinvesting, the risk aversion β must be between zero and one.

If it is less than zero then the investor is a super-optimist that has no concerns with taking on financial risks; otherwise an extreme pessimist would have β = 1 to fully avoid all investment volatility.

Assignment Task 3. Develop techniques to evaluate the performance of money managers;

One way to evaluate the performance of a money manager, in addition to studying their track record, is by looking at the inverse trust.

In a world where most people have been burnt time and time again with predictions from Wall Street analysts about how great certain investments were going to be only for the investments to go belly up, it can be hard to get someone’s word as gold– which is why evaluating processes instead of people is often quite helpful.

There are three primary ways that investors can do this:

(i) examining the evidence of outperformance;

(ii) looking up if there has been any litigation or arbitration procedures brought against said individuals, companies, and/or investment advisers;

(iii) investigating whether any bans from industry licensing mechanisms such as the Financial Industry Regulatory Authority (FINRA) or investment funds have been imposed on them.

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Assignment Activity 4. Critically evaluate theories of asset pricing and their applications in the pricing of securities

The theories of asset pricing then, and their applications in the pricing of securities are considered by many as efficient markets theory (EMT); The random walk theory (RWT); the capital asset pricing model; Black-Scholes Options Pricing Model (BSM).

These models all hypothesize that information is immediately incorporated into prices.

Critics like Shiller have criticized such models because no one has shown how informational differences can be reconciled with EMT or other EM-based postulates and, more importantly to investors because EM-based arguments have been invoked to justify high levels of volatility on stock markets without any empirical backing.

Assignment Activity 5. Analyze issues in the pricing of fixed interest securities and the management of portfolios;

Questions about the pricing of securities and portfolio management are too broad to answer concisely.

Please provide a specific question for me to address, as well as other queries that you might have. In addition, our company’s services are not free and we must evaluate potential clients before executing any service professionally or unscrupulously.

This is done by asking questions pertaining to your needs so that we can determine if they fall within the scope of our expertise.

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Assignment Activity 6. Critically evaluate theories of the term structure of interest rates;

The theory of the term structure of interest rates reflects financial economics, which is a subset of economics that analyses how prices and quantities adjust to changing conditions.

The main tool used in this field is mathematical models based on maximizing people’s expected utility (Euclidian or linear programming usually).

In terms of the “term structures” part, it talks about bonds. Specifically, how long you’ll hold onto them for.

Different theories have different ways but the general idea here is that shorter-term bonds are more sensitive to short-term changes than longer-term bonds which only fluctuate with long-term trends.

Basically, longer maturity periods help keep volatility down because you can use them to smooth your returns as interest rates change over time from low levels to high levels. This is what’s meant by the term “term structure”.

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