Question

You have been taught that in order to expect higher returns, you need to accept increased risk. In describing this concept, what is the correct ranking of asset securities from probable “least market-price volatility, lowest expected return” to probable “highest market-price volatility, highest expected return:”

(1) Large Cap Value stock fund,

(2) Long-term Treasury/Sovereign Bonds

(3) Preferred Stock portfolio,

(4) Emerging-market mutual fund,

(5) Money market fund.

Answer 1

Correct ranking of asset securities from probable “least market-price volatility, lowest expected return” to probable “highest market-price volatility, highest expected return is as follows-

1. Emerging market Mutual fund- Since emerging markets are high beta markets, Mutual funds associated with emerging markets will be highly volatile and highly risky and can generate phenomenal returns.

2. Large cap value stock fund- these funds will also have a moderate risk as they are associated with equities.

3. Preferred stock portfolio- Preferred stock portfolio is consisys of preference share which are lower in risk than equity shares .

4. Money market fund-These fund invest in short term treasury bills and other money market securities so the risk associated would be lower than equities as these all are debt short term securities.

5. long term treasury / sovereign bonds- these kinds of bonds are risk free bonds, which are backed by government and issued for long term so virtually there is no risk.