FINA 200 Lecture Notes - Lecture 9: Canadian Dollar, Capital Gain, Interest Rate Risk

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26 Mar 2018

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Pooled investment fund: an investment vehicle that pools together money from many investors and invests that money in a variety of securities (stocks, bonds or indexes of stocks and/or bonds) Different types of pooled investments: mutual funds, etfs, segregated funds. Diversification: investing in a fund that contains a wide array of investments to reduce risk thereby reducing the likelihood of large losses. Economies of scale: typically the larger the investment fund, the grater the economy where savings can be passed on to investors. Marketability: the ease with which an investor can convert an investment into cash. Equity mutual funds: funds that sell units, or shares to individuals and use this money to invest in stocks. Bond mutual funds: funds that sell units, or shares to individuals and use this money to invest in bonds. Balanced mutual funds: funds that sell units, or shares, to individuals and use this money to invest in a combination of stocks and bonds.

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After getting acquaint with the financial markets products and services, CelestilaMoonn, an UMB Global Affairs major student, decided to invest in mutual funds and hedge funds; however, she sent an e-mail to an advisor in order to find out how hedge funds differ from mutual funds. Advisor tells the following about both products:

"Hedge funds are investment pools that invest funds for (wealthy) individuals and other investors (e.g., commercial banks). They are similar to mutual funds in that they are pooled investment vehicles that accept investorsâ money and generally invest it on a collective basis. Hedge funds, however, are not subject to the numerous regulations that apply to mutual funds for the protection of individuals, such as regulations requiring a certain degree of liquidity, regulations requiring that mutual fund shares be redeemable at any time, regulations protecting against conflicts of interest, regulations to ensure fairness in the pricing of funds shares, disclosure regulations, and regulations limiting the use of leverage. Unlike mutual funds, the average performance fee on hedge funds is lower than the average mutual funds."

Briefly discuss should Moonn make her investment decision based on her advisorâs above clarifications.

After getting acquaint with the financial markets products and services, Celestila Moonn, an Global Affairs major student, decided to invest in mutual funds and hedge funds; however, she sent an e-mail to an advisor in order to find out how hedge funds differ from mutual funds. Advisor tells the following about both products: "Hedge funds are investment pools that invest funds for (wealthy) individuals and other investors (e.g., commercial banks). They are similar to mutual funds in that they are pooled investment vehicles that accept investorsâ money and generally invest it on a collective basis. Hedge funds, however, are not subject to the numerous regulations that apply to mutual funds for the protection of individuals, such as regulations requiring a certain degree of liquidity, regulations requiring that mutual fund shares be redeemable at any time, regulations protecting against conflicts of interest, regulations to ensure fairness in the pricing of funds shares, disclosure regulations, and regulations limiting the use of leverage. Unlike mutual funds, the average performance fee on hedge funds is lower than the average mutual funds." Briefly discuss should Moonn make her investment decision based on her advisorâs above clarifications.

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Todd OâHanlon has worked in the management services division of Focus Consultants for the past five years. He currently earns an annual salary of about $120,000. At 33, heâs still a bachelor and has accumulated about $100,000 in savings over the past few years. He keeps his savings in a money market account, where it earns about 3 percent interest. Todd wants to get âa bigger bang for his buck,â so he has considered withdrawing $50,000 from his money market account and investing it in the stock market. He feels that such an investment can easily earn more than 3 percent. Heidi Jackson, a close friend, suggests that he invest in mutual fund shares. Todd has approached you, his broker, for advice.

What special fund features might help Todd achieve his investment objectives? What types of mutual funds or ETFs would you recommend to Todd? What recommendations would you make regarding Toddâs dilemma about whether to go into stocks, mutual funds, or ETFs? Explain. Explain to Todd the rationale for choosing ETFs over mutual funds.

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FINA 200 Lecture Notes - Lecture 9: Canadian Dollar, Capital Gain, Interest Rate Risk

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