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Question 2
(a) Clifford Asnees notes that while “critics of international diversification observe that it does not protect investors against short-term market crashes because markets become more correlated during downturns, this observation misses the big picture’. Over longer horizons, underlying economic growth matters more than short-lived panics with respect to returns, and international
diversification does an excellent job of protecting investors. Comment on this statement.
(b) Suzanna plans to save for her 4-year school, which starts 6 years from now.
Suzanna will need to make the first payment 6 years from today. She identifies a savings plan that allows her to earn an interest of 8 percent annually. The current annual expenditure is $7,200 and it is expected to grow by 7 percent annually. How much should Suzanna deposit each year, starting one year from today? Assume that she plans to make 4 payments.
(c) When assessing the potential return on investment, consider all the elements at play, including yield, capital gain, risk, expenses, and taxation. Return comprises both income and capital gain, and fewer expenses. There are also significant tax implications when purchasing an investment property. Risk
plays a part when you consider the worst-case scenario and whether or not
you can afford it. Broadly speaking, investment decision relies on making
most of their return from the project activity, whereas residential investments
tend to rely more heavily on making a capital gain. Calculating your figures
before you invest is critical to make sure your investment return is worth the
risk. Thus, the definition of the required rate of return is the minimum that a
project or investment must earn before company management approves the
necessary funds or renews funding for an existing project. Give your
comment on the above statement.
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