Question 1 ii: Why do investors add real estate in their portfolio?
Answer
The main aim of an investor, while deciding on a portfolio is to maximize
return and minimize risk of holding an asset. The total return comprises of
the periodic receipts plus change in price of the asset or capital appreciation.
The risk in investment is the chance that the realized return may be less
than the expected return.
In case of investment in real estate, the investor receives periodic receipts in
the form of rentals and the property generally appreciates over period of
time. Another reason to choose real estate in portfolio is its ability to serve
as an inflation hedge, since the owner can increase rentals during inflation.
Real estate also has the unique ability to reduce risk in the way properties
are leased. Portfolios that have followed a cash flow strategy and decided to
lock in rates in long-term leases have less risk exposure to market
movements, but they also have less inflation-hedging ability
Question 2ii: ‘Stock market indices are the barometers of the stock
market’ – Discuss?
Answer
Stock market indices are the barometers of the stock market.
These help to recognize broad trend in the market. The investor can use the
indices to allocate the funds rationally among the stocks. Technical analysts
use the indices to predict the future of market.
The Dow Jones Industrial Average (DJIA), one of the most popular stock
market indices experienced a downfall in the early stages of 2004 which was
largely attributed to an increase in the Money Supply by the Federal Reserve
in the USA . The Technical Indicator Index (TII) studies incorporating the
Short Term Index and Intermediate Term Index from the period January to
May 2004 for the American equity markets showed largely negative or
bearish trends for both the indices as they closed at 3.50 and 48.48
respectively. Whereas the short-term index is a useful predictor of equity
5
markets over the short run, the intermediate term index serves as a warning
system for trend changes of considerable magnitude
Answer
The main aim of an investor, while deciding on a portfolio is to maximize
return and minimize risk of holding an asset. The total return comprises of
the periodic receipts plus change in price of the asset or capital appreciation.
The risk in investment is the chance that the realized return may be less
than the expected return.
In case of investment in real estate, the investor receives periodic receipts in
the form of rentals and the property generally appreciates over period of
time. Another reason to choose real estate in portfolio is its ability to serve
as an inflation hedge, since the owner can increase rentals during inflation.
Real estate also has the unique ability to reduce risk in the way properties
are leased. Portfolios that have followed a cash flow strategy and decided to
lock in rates in long-term leases have less risk exposure to market
movements, but they also have less inflation-hedging ability
Question 2ii: ‘Stock market indices are the barometers of the stock
market’ – Discuss?
Answer
Stock market indices are the barometers of the stock market.
These help to recognize broad trend in the market. The investor can use the
indices to allocate the funds rationally among the stocks. Technical analysts
use the indices to predict the future of market.
The Dow Jones Industrial Average (DJIA), one of the most popular stock
market indices experienced a downfall in the early stages of 2004 which was
largely attributed to an increase in the Money Supply by the Federal Reserve
in the USA . The Technical Indicator Index (TII) studies incorporating the
Short Term Index and Intermediate Term Index from the period January to
May 2004 for the American equity markets showed largely negative or
bearish trends for both the indices as they closed at 3.50 and 48.48
respectively. Whereas the short-term index is a useful predictor of equity
5
markets over the short run, the intermediate term index serves as a warning
system for trend changes of considerable magnitude
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