Finance assignment – Define and distinguish between real and financial assets

According to Damodaran (2012), real assets often refer to this kind of assets which are used to produce goods as well as services such as factories, human resources, equipments, land and so on. And at the same time, unlike the real assets, financial assets often refer to these intangible assets including stocks bonds as well as the deposits in the banks and so on.

There are also several differences between the real assets and financial assets. First, real assets often have physical forms which we can touch and see, while financial assets are often intangible. Second, real assets are often employed to manufacture goods and services, while financial assets are used to claim real assets or incomes from real assets (Damodaran 2012).

Question 3

We should point out the negative attitude towards the importance on the expected return and standard deviation for an investment of this friend may be wrong. As Baker (2011) promoted that whether you are a investor, an entrepreneur, financial manager or a person involved in the financial market, it is so necessary to make evaluation on three basic question before making investment decisions including the percentage of return from the investment, involved risks and measures to remove risks.

And the measure of expected return and standard variation can assist us to relatively well answer the three questions and support us to understand whether our investment decision is worthwhile. For instance, if the results measured by the expected return and standard variation for an investment are so negative, we should give up such investment plan, which can save not only money and time for us to consider other better investment plan.

Question 4

Based on the efficiency theory, we may have the following hypothesis in the three different market efficiency levels. First, when the market is in the level of weak form efficiency for the medical research company. It may become difficult for these investors to gain excess returns via the development of trading regulations or rules based on the historical information on investment return and other related issue (Horne & Wachowicz 2005).

Second, when the market for the medical research company is in the level of Semistrong form of efficiency, it may also be impossible for investors on the products from this medical research company to gain excess return via employing the trading regulations or rules based on the information available in the market (Horne & Wachowicz 2005).

Third, when the market for the medical research company is in the level of strong form of efficiency, the difficulty level for investors to gain excess returns by using these information or not will be increased as well (Horne & Wachowicz 2005).

Question 5

Shinozawa (2010) pointed out there are several risks faced by the unit trust holders including the following issues.

The first risk is that the unit trust holders may face the situation that there is no guarantee for their investment including the distribution of the income, returns and so on. The second risk faced by these unit trust holders refers the the general market risks caused by the different developing level of economy in different regions, political environment, legal environment, movement of interest rates and so on. Thirdly, the possibility to face the security specific risk should also be aware by the unit trust holders, which often includes the repayment’s defaulting on the coupons, degraded credit rating of a company and so on. Fourthly, there is also the liquid risk which may make the sale price of these securities at or only near its fair value rather than make the unit trust holders gain more returns. Fifthly, the inflation risks may also decrease the purchasing power of these unit trust holders due to increasing product price.

Based on the actual situation of the unit trust market, the major risk may be the almost no guarantee for these investments due to different situation and environment (Shinozawa 2010). While at the same time, the risk level for different fund may also differ, which is influenced by the financial situation of the different unit trust company, inflation level, economic situation in different region and other factors. For instance, the risk level for the unit trust which an investor purchases in China may be different from that he purchases in the USA (Shinozawa 2010).

Reference

Baker, H.K. 2011, Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice, John Wiley & Sons, Inc., New Jersey,

Buchanana, B. G., Gordonc, R. & Philip, C. E. 2011, Emerging market benefits, investability and the rule of law, Emerging Markets Review, Vol. 12, Issue 1,

Damodaran, A. 2012, Investment valuation: Tools and Techniques for determining the value of any assets, John Wiley & Sons, New Jersey,

Horne, V. J. & Wachowicz, J. 2005, Fundamentals of financial management, John Wiley & Sons, New Jersey,

Shinozawa, Y. 2010, Mutual versus proprietary ownership: An empirical study from the UK unit trust industry with a company- product measure, John Wiley & Sons, New Jersey,

Leave a Reply

Your email address will not be published.