Objectives
1 Understand how to calculate the return on an investment.
2 Understand the historical returns on various important types of investments.
3 Understand the historical risks on various important types of investments.
4 Understand the implications of market efficiency.
Which of the investments discussed have had the highest average return and risk premium?
Which of the investments discussed have had the highest standard deviation?
What is capital market efficiency?
What are the three forms of market efficiency?
Summary and conclusions
Risky assets, on average, earn a risk premium.
The greater the potential reward from a risky investment, the greater the risk.
In an efficient market, prices adjust quickly and correctly to new information.
The efficient market hypothesis (EMH) states that well organised capital markets are efficient, and investors cannot make abnormal returns.
Asset prices in efficient markets are rarely over or under priced, because ‘all available' information has already been factored into the price, and investors get exactly what they pay for.
What are the important factors that should be considered by tertiary sector employees when they are deciding whether to place their superannuation contributions in the Defined Benefit Plan or the Investment Choice Plan?
What issues relating to the concept of the time value of money may be important in this decision-making process? Explain. (1500 words).
B. "If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin." Explain why this is not the case. (500 words).