...CHAPTER ONE INTRODUCTION 1.0 OVERVIEW This paper intent to analyze the performance of Islamic equity unit trust funds’ in CIMB Wealth Advisors Berhad by comparing with the FTSE Bursa Malaysia Composite Index (KLCI) as benchmark. This chapter will discuss the background of the study, historical development of unit trust industry in Malaysia, understanding unit trust, problem statement, research objectives and the significance of the study. 1.1 BACKGROUND OF THE STUDY A plenty of investments alternative can be seen nowadays. But it’s depends on people which alternative they prefer to invest or depend on their skills of investing in such instruments. Most of the people who are lack in financial knowledge or investing skills will prefer to make investments in unit trust funds. There has abundance of benefits in unit trust and also can be advantageous to the small investors. Unit trust is an ideal way for small investors to invest for their future. Small investors are people who earn their living engaged in activities not related to the financial arena. They are aware that investing is important to them, but they lack of know-how to make the right decisions. For people who are unable or unwilling to do research and analyze investment markets and climate on their own, unit trusts is a good way to invest. In order to maintain a portfolio of stocks in the share market, a person has to keep himself up-to-date with market information and climate. For many people, this is difficult...
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...−1 where N is the number of times until the first tail appears. How much should the casino charge to play this game, how much should a player expect to play the game? This game was played in 18th century St Petersburg and numerous mathematicians, including Bernoulli were interested in it, since the expected payoff of the game is infinite ∞ E[X] = k=1 2 k−1 1 = 2k ∞ k=1 1 2 1 Utility functions In 1728, a Swiss mathematician, Gabriel Cramer, observed that “the mathematicians estimate money in proportion to its quantity, and men of good sense in proportion to the usage that they may make of it”. 2 Modern psychology explains utility in terms of how we perceive wealth, for example • A beggar will value a £1 much more than a millionaire. A pound may double the wealth of the beggar where as a millionaire would never notice the loss of a pound. • The expectation of an uncertain outcome is worth less than a certain outcome. • Future earnings are perceived as being worth less than current earnings, you do not know what your...
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...increase in wealth, satisfaction will increase as well. For this utility function, we will get: U (W ) 0 . This W U (e W ) 0 (e W )( ) 0 e W 0 W Because W > 0, we can then conclude that more is preferred to less consumption given the utility function. (1b) To prove that the consumer is risk averse we must show that this utility function has diminishing marginal utility wherein the condition that the marginal utility from an extra increase of utility decreases as your payoff increases. Hence, this would represent risk-aversion since the bigger the amount of money that is at stake, the higher satisfaction from winning is offset by an even higher dissatisfaction from losing. For this utility function we get: U 2 (e W ) 0 must be satisfied. This means 2W U 2 (e W ) U 2 (e W ) ( e W )( ) 2e W 0 0 2 2 W W Since the second order derivative of the function gives a negative value, we could say that the consumer is risk averse. (2a) There are two measures of risk aversion that was developed by Pratt and Arrow. The first measurement would be the absolute risk aversion coefficient/index. This measurement helps show how much wealth an individual is willing to expose to risk as a function of changes in wealth. In order to solve for this, we used the formula that was defined by Pratt and Arrow, A(W ) . For this utility function we get: U "(W ) U '(W ) A(W ) (2b) The second measurement of risk aversion...
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...ACCUMULATION OF RETIREMENT WEALTH James Poterba Joshua Rauh Steven Venti David Wise Working Paper 12597 http://www.nber.org/papers/w12597 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2006 We are extremely grateful to Tonja Bowen for extraordinary and tireless research assistance, to Gary Engelhardt and Anil Kumar for graciously providing us with tabulations from their HRS Defined Contribution Plan imputation algorithm, to Paul Bingley, Peter Diamond, Gary Engelhardt, Jon Gruber, Helena Stolyarova, and many seminar participants for helpful comments, and to the National Institute of Aging for research support under grant number P01 AG005842. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. © 2006 by James Poterba, Joshua Rauh, Steven Venti, and David Wise. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Defined Contribution Plans, Defined Benefit Plans, and the Accumulation of Retirement Wealth James Poterba, Joshua Rauh, Steven Venti, and David Wise NBER Working Paper No. 12597 October 2006 JEL No. J14,J26,J32 ABSTRACT The private pension structure in the United States, once dominated by defined benefit (DB) plans, is currently divided between defined contribution (DC) and DB plans. Wealth accumulation in DC...
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...Working in a publicly held corporation 3. Efficient market 1. As financial manager • We should think and solve problems like financial managers. • First, we need to understand their goal: maximize shareholder’s wealth • What represents shareholder’s wealth? Stock Prize (prize of the shares of the firm) Difference between profit maximization and shareholder’s wealth maximization Shareholder’s wealth maximization: considers timing, cash, and risk. Cash Profit is not equivalent to cash. If the net income of the firm increases, it does not mean that the money of the owner increases as well. However, if the stock price increases, shareholder’s wealth also increases. If you own 100 shares and each share costs P1,000, it is equivalent to P100,000 worth of shares. If the stock price increases from P1,000 to P1,100, the wealth increases to P110,000 worth of shares. Risk Profit maximization fails to account for risk. SWM considers risk as one of the factors in determining stock price. The higher the risk, the lower the stock price is.In addition, the greater the risk associated with receiving a future benefit, the lower the value investors place on that benefit. Stock prices, the measure of shareholder wealth, reflect the magnitude, timing, and risk associated with future benefits expected to be received by stockholders. Some investment projects...
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...Profit Maximization and Wealth Maximization are two objectives of Financial Management. Financial Management takes cares for proper utilization of funds, such that it will increase company earnings. Profit Maximization refers to the profit of the firm should be increased while in Wealth Maximization objective of a firm is to maximise its wealth and the value of its shares. There is always a debate regarding which more important. Profit Maximization The basic concept behind profit maximization is to earn a large amount of profit. It is a short term objective of the company (every fiscal cycle). There is no consideration for risks and uncertainty. It acts as measure for operational efficiency of the company. Profit maximization is necessary for growth and survival of the company. Wealth Maximization The goal of wealth maximization is to improve market value of shares. The main focus is on achieving long term objectives. There is consideration for risks and uncertainty. It tends to gain a large market share. It accelerates the growth rate of a company. I cannot say which one is better. Profit is basic requirement for any company. Profit feeds oxygen in the system to take breathe and survive. As we know profit is directly proportional to the risk. Higher the profit, the higher will be the risk. Risk factor can be neglected for a short run (profit maximization) but in long run (wealth maximization) risks or uncertainty cannot be ignored. Shareholders invest in company in hope...
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...Ch26-Basic Tools of Finance 1. The future value of a deposit in a savings account will be larger a. the longer a person waits to withdraw the funds. b. the higher the interest rate is. c. the larger the initial deposit is. d. All of the above are correct. 2. Edgar has four savings accounts. Which one has the most in it? a. $100 deposited 1 year ago at an 8% interest rate. b. $100 deposited 2 years ago at a 4% interest rate. c. $100 deposited 4 years ago at a 2% interest rate. d. $100 deposited 8 years ago at a 1% interest rate. 3. Suppose that the price of a bond is equal to the sum of the present value of its future payments. Suppose further that this bond pays $50 in one year and $1,050 in two years. What is the price of the bond if the interest rate is 5 percent? a. $1,050.00 b. $1,045.35 c. $1,000.00 d. $945.35 4. Prospect theory says that a. people should follow their gut feelings and purchase stocks they think have good prospects. b. people will tend to sell off winning investments too quickly and hold onto losing ones too long. c. people tend to be overly pessimistic about developments in the stock market. d. during a speculative bubble most people are thinking that they won’t be able to get out of the market before the bubble bursts. 5. Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years...
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...What is Shareholders’ Wealth Maximization? Shareholders are individuals who own a share of a firm or an organization by buying stocks of that organization and as a result they are entitled of any financial profit made by any economic activity that generates those profits. Shareholders Wealth Maximization is a modern approach adopted by financial management that aims to increase the wealth of shareholders in a long term process rather than making short term profits. This objective can be achieved by maintaining a relatively high stock market price of the company which will reflect the wealth of its shareholders and affect the company’s behaviors in regards to decision making. As the stock price increases, the wealth of those who hold the stock increases as well and the net value of the company increases as a result. This decision making process takes into consideration any risk factors that might compromise the main objective and for this reason the financial manager must be aware and in full knowledge about the parameters that could affect the stock price. What is profit maximization? Profit maximization is basically the process of identifying the most efficient manners in which the highest net income, or profit, with the resources and market share in hands can be obtained. The major difference between profit maximization and shareholders’ wealth maximization is that the former focuses on relatively high gains in short periods of time that can be gained through, for example;...
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...CHAPTER 1 NATURE OF FINANCIAL MANAGEMENT Q.1. A.1. Q.2. A.2. Q.3. A.3. Q.4. A.4. Define the scope of financial management. What role should the financial manager play in a modern enterprise? The scope of the financial management is to secure the capital needed by the enterprise, and employ it in production and marketing activities, in such a way that it can generate the sufficient returns on invested capital, with an intention to maximise the wealth of the owners. The financial manager plays the crucial role in the modern enterprise by supporting investment decision, financing decision, and also the profit distribution decision. He/she also helps the firm in balancing cash inflows and cash outflows, and in turn to maintain the liquidity position of the firm. How does the modern financial manager differ from the traditional financial manager? Does the modern financial manager's role differ for the large diversified firm and the small to medium size firm? The traditional financial manager was generally involved in the regular finance activities, e.g., banking operations, record keeping, management of the cash flow on a regular basis, and informing the funds requirements to the top management, etc. But, the role of financial manager has been enhanced in the today's environment; he/she takes an active role in financing, investment, distribution of profits, and liquidity decisions. In addition, he/she is also involved in the custody and safeguarding...
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...Typical Business Plan for a Financial Advisor A.) Executive Summary: The role of the wealth manager is not to simply sell a financial product to a prospect. Instead, a wealth manager’s first concern is developing a comprehensive understanding of the client, a client-centric approach to providing financial solutions. Next the wealth manager must match the right solutions to the client’s needs and desires and ensure he or she receives an exceptional service experience. After that, product and service sales opportunities will naturally follow. Making the transition is clearly a trade-off between short-term results and long-term success. Financial security through goals-based wealth management. As a wealth manager with Merrill Lynch, the emphasis would be on marketing and looking for ways to help clients with a broad array of financial capabilities. The objective is to help clients achieve their goals and dreams, whether it’s living in luxury, providing charitable contributions and/or leaving a legacy for family and friends; consult and advise clients how to best save and structure their investments to reach their goals. 1. What would your specific goals be for new assets under management? a. Year 1 – 10 Million of Assets Under Management ( 10 qualified contacts per day, 1-2 new accounts per week ). b. Year 2 – 20 Million of Assets Under Management ( 20 qualified contacts per day, 2-3 new accounts per week ). c. Year 3 – 30 Million of Assets Under Management ( 30 qualified...
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...differences in profit computing. It means when firms compute profits, they follow certain accounting principles which focus on accrued revenues and costs. A firm that is profitable according to accounting principles may spend more cash that it receives and an unprofitable firm may have larger cash inflows than outflows. There is a famous expression in finance saying:” you cannot pay your bills with earning, only with cash!!” In finance, we place more emphasis on cash than on profit or earning. * Finally, as a manager you have to include variability or risk. Focusing only on earning may ignore them. When comparing two investment opportunities, we must consider both the risk and the expected return of the investment and we face a trade-off between risk and expected return. These three reasons reveal that profit maximization, by itself, is an unsuitable goal. Maximize shareholders wealth According to me “maximizing shareholders wealth would be appropriate goal to maximise profit” let us see why Current theory asserts that...
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...1. Items that must be monitored can be categorized in one of three ways. (683) We can categorize most items that need to be monitored in one of three ways: 1. Investor circumstances, including wealth and constraints. 2. Market and economic changes. 3. The portfolio itself. 2. List and define three primary events which can affect the income, expenditures, risk exposures, and risk preferences for private wealth clients. (684) For private wealth clients, events such as changes in employment, marital status, and the birth of children may affect income, expenditures, risk exposures, and risk preferences. Each such change may affect the client’s income, expected retirement income, and perhaps risk preferences. The responsibilities of marriage or children have repercussions for nearly all aspects of a client’s financial situation. Such events often mark occasions to review the client’s investment policy statement and overall financial plan. Identify the seven events that could cause a change in the liquidity requirements for a private wealth client. 3. Identify the seven events that could cause a change in the liquidity requirements for a private wealth client. (685) Individual clients experience changes in liquidity requirements as a result of a variety of events, including unemployment, illness, court judgments, retirement, divorce, the death of a spouse, or the building or purchase of a home. 4. Monitoring a client's tax situation in order to achieve tax...
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...When we operate a business, maximizing company’s wealth is more suitable than maximizing its profit as a goal of the business, it is because maximizing profits relates to profits only, and it assumes away the problems such as uncertainty of returns and the timing of returns, while maximization of the market value of the owners’ equity has take into all the considerations of all the financial decisions, such as wealth for the long term; risk or uncertainty; the timing of returns; and the stockholders’ return. Maximization of profits is regarded as the most commonly cited goal, always concern with the operational plans, but it is not a suitable objective at all, because there are many alternatives inside this outlined goal, For example, does that mean a short term or long term maximization target? Or what kind of profit is the target focuses on? It is not a fully appropriate objective, partly because it does not specify the timing or duration of expected returns. Is the investment project that will produce $100,000 return 5 years from now more valuable than the project that will produce annual returns of $15,000 in each of the next 5 years? An answer to this question depends upon the time value of money to the firm and to investors at their interest. Another shortcoming of aiming at maximizing profit is that it does not consider the risk or uncertainty in the process of making profits. Some investment projects are more risky but the profit cannot reflect this situation. As...
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...ACF 504: FINANCIAL MARKETS Coursework Assignment II GROUP 20 Definition of the Dataset (Word Count 1938) The dataset used in this report is derived from Thomson ONE Banker. The spreadsheet in Appendix contains the daily price of the TESCO and the FTSE All Share index during the period from 1 December 2014 to 30 November 2015. Each closing price includes 254 observations. We obtain 253 daily returns of the TESCO and 253 daily returns of FTSE index after calculating daily simple returns by using the following formula. = − −1 −1 The Capital Asset Pricing Model (CAPM) Before calculating the annualized standard deviation of daily stock returns and index returns, assuming that the expected return on the index is equal to the average of simple index returns, the expected return on the index equals to -0.002%. Since the number of sample of daily index returns is 253, we calculate the annualized expected return on the index as below. ((1 − 0.002%)253 − 1) = −0.606% The following formula is used to calculate the sample standard deviation: 253 1 S=√ ∑( − ̅ )2 253 − 1 =1 By using Excel function of STDEV.S, the sample standard deviation of daily index returns and of daily stock returns are 1.01% and 2.05% respectively. After multiplying by√253, the annualized sample standard deviation of daily index returns (S ) and of daily stock returns ( ) are 16.06% and 32.59%, respectively. The correlation of daily returns between the FTSE index...
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...CHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS PROBLEM SETS 1. (e) 2. (b) A higher borrowing rate is a consequence of the risk of the borrowers’ default. In perfect markets with no additional cost of default, this increment would equal the value of the borrower’s option to default, and the Sharpe measure, with appropriate treatment of the default option, would be the same. However, in reality there are costs to default so that this part of the increment lowers the Sharpe ratio. Also, notice that answer (c) is not correct because doubling the expected return with a fixed risk-free rate will more than double the risk premium and the Sharpe ratio. 3. Assuming no change in risk tolerance, that is, an unchanged risk aversion coefficient (A), then higher perceived volatility increases the denominator of the equation for the optimal investment in the risky portfolio (Equation 6.7). The proportion invested in the risky portfolio will therefore decrease. 4. a. The expected cash flow is: (0.5 × $70,000) + (0.5 × 200,000) = $135,000 With a risk premium of 8% over the risk-free rate of 6%, the required rate of return is 14%. Therefore, the present value of the portfolio is: $135,000/1.14 = $118,421 b. If the portfolio is purchased for $118,421, and provides an expected cash inflow of $135,000, then the expected rate of return [E(r)] is as follows: $118,421 × [1 + E(r)] = $135,000 ...
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