GROUP 2 Assignment Topic 5: Assessing Risks in a Bond Fund and in an Equity Fund 1.

. Based on the data compared of the returns and risks on the 2 funds (PAIF in Government Bond and MSCI in Stock) we have some brief analysis as below: Table 1 Aver Return Max Return PAIF 0.29% 3.48% MSCI 1.10% 14.44% 14.98% 1.06% 6.42% 0.57%

Min Return -4.16% Med Return 0.53% Standard Deviation 1.78% Expected Return 0.29% Correlation 0.67 The attached excel file for data and calculation

Because the return change of PAIF is not widely fluctuated (it means thats quite stable) so the expected return is considered as the everage return with 0.29% monthly. For MSCI, this fund investment focus on the top industrial and financial stocks in NICs and China such as Sumsung Electronic, China Mobile, Huyndai Motor, China Construction Bank AIA, DBS Therefore the everage return is higher with 1.01% monthly. With the expected return of each asset after adjustment and the correlation of 0.67 we can have hereafter the portfolio diversification as in table 2 Table 2 Portfolio 1 2 3 4 5 6 7 8 9 10 11

PAIF 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

MSCI Expected Return 100% 0.504% 90% 0.482% 80% 0.460% 70% 0.438% 60% 0.416% 50% 0.394% 40% 0.372% 30% 0.351% 20% 0.329% 10% 0.307% 0% 0.285%

Expected STD 6.5788% 6.0414% 5.5074% 4.9780% 4.4547% 3.9401% 3.4380% 2.9547% 2.5014% 2.0973% 1.7764%

Return/SD 7.65% 7.97% 8.35% 8.80% 9.34% 10.01% 10.83% 11.86% 13.14% 14.63% 16.04%

The highest Expected Return is 0.504% in MSCI and the lowest Expected Standard Deviation is 1.7764%. However the Highest rate of Return/Standard Deviation is 16.04 for PAIF. As my understanding the investment in PAIF is better for the investor who is interested in high return with reasonable risk.

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0.500%

0.400%

0.300%

Series1

0.200%

0.100%

0.000% 0.0000%1.0000%2.0000%3.0000%4.0000%5.0000%6.0000%7.0000%

2.

List all the risk factors that affect each fund. In assessing the risk related to the ABF Pan Asia Bond Index Fund, there are some factor as default risk, liquidity risk, interest rate & inflation risk, currency risk, early termination risk and rating risk. The default risk may happen if the borrower (the government) cannot assure the payment responsibility. A good example is the public debt in European Countries such as Greece, Spain, Portugal or even Italia. The liquidity risk is always a big possibility because the government bond is not easy to trade in the market. The interest rate risk is also able to occur if because the bonds interest rate is lower than the market expected return. The inflation risk can happen when the government (of Bond issued) have some economic, financial or monetary policies that cause the inflation rate increased higher than the bond interest rate. Vietnam has witness this risk in last two years with inflation of 18% (2011) and 23% (2010). The currency risk arises in the event that the issuing government devalues its currency compared to the USD. We remember that Vietnam has devaluated VND currency several times in last year for the purpose of export increase. The rating risk is of the factor affecting the government bond and bond fund if the country credit rating dropped down in accordance with the rating agencies such as S&P, Fitch or Moody.

In assessing the risk related to the MSCI, all the risk above of a Bond Fund can impact to the Sock Fund. Furthermore, MSCI can face to the others risk like the nature of the market, market regulations and bankruptcy. Vietnam is once more given a good example in last year with nearly 40,000 firms closed (disappeared) which among is a lot of securities companies and foreigner fund.