Question

The Jupiter superannuation trust manages the following funds, each with a specific objective. Rank these funds in the order of their risk so that 1 is the lowest risk fund and 5 is the highest risk fund. Fund name Fund objective Risk ranking Australian shares fund aims to provide access to capital growth and dividends through investment in the Australian share market Money market fund aims to provide a high level of capital security Moderate growth fund aims to provide a moderate level of capital growth over the long term through a diversified portfolio Global shares fund aims to provide medium to long term capital growth from investment in overseas share markets Property securities fund aims to provide a diversified portfolio of property investments for long term capital growth

Answer 1

Property securities - 5 as it's a sector specific fund. The diversification for this fund is minimum as it's exposed to a particular sector. It may be diversified across different property investments but diversification across sectors is nil. If there is a negative event in the real estate sector then it will affect the fund.

Australian shares fund - 4 This fund has exposure to a particular country's shares. In case there is an an event affecting the country's economy, major stocks will come plummeting down. Again the investor will be exposed to risk pertaining to a particular country with very little diversification of investments.

Global shares fund -3 This fund is slightly more diversified than as compared to the above two funds in terms of exposure across sectors and countries.

Moderate growth fund -2 This fund is held for the long term with some amount of diversification. This fund provides medium amount of growth. As this has some amount of diversification and focusing on growth stocks or value companies which are not so risky, the risk will be less compared to above 3.

Money market fund -1 will be least risky as it aims at capital protection and is as good as investment in a treasury bill.