Corporate Finance for Asset Allocation and Risk Management

Question: Discuss about theCorporate Finance for Asset Allocation and Risk Management. Answer: Nowadays, retirements plans like defined contribution plans, defined benefit plans, and other investment plans are required to secure the lives of employees. Employees do not have job securities for their entire lives. Moreover, similar to business owners, they are not secure about their future. In this case, they have to invest their superannuation contributions in retirement plans. By investing in these plans, they will get a fixed income as returns on their investments. These returns ensure them that they are secure for their entire lives and do not depend on other people for endurance (McKeown, Kerry, Olynyk and Beal, 2012). Along with this, defined benefit plans and investment choice plans can be considered the most effective plans in which the tertiary sector employees may place their superannuation contributions in a more secure and safe manner. On the other hand, it is true that each and every thing in this world has both positive and negative aspects. These investment plans provide returns to the investors; but there are some risks linked to these plans. The tertiary sector employees should observe all these things before placing their superannuation contributions in any plan. There are some important factors related to these plans that should be considered by employees to decide whether to place or not their superannuation contributions in these plans. For case, the major factor that should be considered is the market trends related to these plans (Gallery, Newton and Palm, 2011). The market trends highly contribute to select an appropriate investment plan to gain high returns on the investments. It is because of with the help of these market trends, they would be able to compare all the available plans with one another. They will also be able to recognize the level of profit and risk linked to these investment plans. In addition to this, the other factor is risk level that should be considered by the employees. It is because of with the help of this factor they would be able to recognize that investment plan is risky or not. If it is risky then what is the extent of risk. They are proficient to tolerate this risk. So, with the help of this, they would be able to identify their risk tolerance capacity before making any decision. Moreover, expected returns is the another important factor that should be considered by the investors before placing their superannuation contributions in a defined benefit plan or an investment choice plan. The tertiary sector employees should evaluate that the selected plan is able to offer returns as per their expectations. They must identify that these plans are offering the returns according to the money that they have invested. The returns justify the level of risk that they are willing to tolerate (Broadbent, Palumbo and Woodman, 2006). So, risk and return are two i mportant factors that play a significant role to determine that people should or not invest in an investment plan. In the same manner, investment need is another important factor that may influence an investment decision of people. Tertiary sector employees should recognize their investment needs properly. They should decide that is an investment is required for them? They want an investment plan in actual. They have any need of these investment plans. There future is not secure without these plans. They do not have enough funds for their existence. All these are the major things that should be considered by the employees to identify their investment needs in an effectual manner. So, the actual investment needs of employees would be helpful to choose suitable investment plans (Brown, Gallery, Gallery and Guest, 2004). Apart from this, time frame is the other factor that should be considered by the employees to decide to choose an investment plan. With the help of this factor, they would be able to understand that, they are willing to invest for a short duration or a long duration. They would also be able to calculate their return for both short and long time period. By considering this factor, tertiary sector employees will be able to decide that which plan is proficient to offer expected returns in a pre-determined time period. On the other hand, the tertiary sector employees should decide that which stock, portfolio, and equity are able to fulfill their investment needs in an effective manner. They should estimate that which option is profitable and will offer high returns at lower risks. The selection of an investment plan is not an easy task. They should evaluate that these plans are offering fixed income or variable income to the investors. Sometimes, people invest their superannuation contributions in such investment plans and get returns according to the up down of the stock share market. Such plans may very risky for the investors. These plans never provide high returns to the investors (Hrtel, and Fujimoto, 2014). So, the above discussed are the important factors that the tertiary sector employees must consider to choose an investment plan that may fulfill their needs as well as expectations in an effectual and a significant manner. Apart from this, the concept of TVM (Time Value of Money) contributes in the selection of an investment plans. TVM is an important part of the investment theory (Petty, Titman, Keown, Martin, Martin and Burrow, 2015). TVM highly contributes in an investment choice because of it include all the present value and future value related to a particular plan. Moreover, with the help of TVM, investors may calculate the actual returns that they will get in a pre-determined time frame. But, there are some issues related to this concept that may influence the investment decisions of investors. For case, uncertainty and feasibility are some issues that may be important in the investment decision-making process. It is because of with the help of these issues, the investors would be able to see the uncertainties exist in the marketplace. They will be able to recognize that the selected plan is feasible to offer returns according to their expectations (Gutmann, 2013). In this way, the concept of T VM plays a critical role to select an investment plan in an appropriate manner. The efficient-market hypothesis is an effective investment theory that contributes in the selection of an appropriate portfolio to get high returns on the investments. EMH theory plays a significant role to choose a fair valued stock and portfolio to gain expected returns on the investments (Graham and Dodd, 2008). Along with this, this theory allowed the business organizations to trade on fair values of stocks. The EMH theory restricts to business firms to trade undervalued stocks in the marketplace. Moreover, the efficient market hypothesis ensures that the business organizations are not trading undervalued stocks at unfair prices in the marketplace. So, the EMH theory is plays a significant role in the investment decision making process. By considering the EMH theory, the buyer would be able to buy diversified stocks only at reasonable prices. Such stocks provide high returns to the investors. Diversified stocks ensure to investors that they would be able to earn high profits at l ower risks (Tyson, 2016). On the other hand, efficient-market hypothesis plays a major role to pick a portfolio to get high returns. Nowadays, the pension fund manager contributes in the choice of portfolio to the investors. The manager has enough knowledge regarding stock market. So, investors ask to the manager to choose suitable portfolios for them. But, the manager should not choose a portfolio with a pin. In other words, it can be said that, the fund manager should not pick lots of portfolios only on the base of the exactness of the efficient-market hypothesis. It is because of portfolios with a bunch may be uncertain to the investors (Naseer and Bin Tariq, 2015). Moreover, portfolios in a bunch increase the chances of risks and decrease the profits to investors. The main reason behind it is that, such portfolios never ensure that the investors have purchased well-diversified portfolios at once. It is because of there are uncertainties in the marketplace; and all the portfolios of an organization would n ot be diversified in an equal manner. In addition to this, the fund manager should make such investment decisions cautiously. The efficient-market hypothesis restricts to buy portfolio in group. It is because of by choosing portfolio in group, people may face troubles. These portfolios may be dangerous for the lives of investors. It is because of such portfolios may reduce the risk tolerance capacities of investors. In this situation, the fund manager should involve some guidelines to pick a suitable portfolio to investors. First of all, the manager should ensure that the portfolio that he/she is selecting to investors is well diversified portfolio. The selected portfolio is neither undervalued nor overvalued. It is because of such portfolios fulfill the expectations of the investors (Lee, Lee and Lee, 2009). Along with this, the manager must ensure that the selected portfolio will work in the good deed of its investors. The portfolio should be as per the risk tolerance capacity of investors. So, on the whole, it can be said that, the pension fund manager might not decide on a portfolio in group just on the base of the precision of EMH theory. References Broadbent, J., Palumbo, M. and Woodman, E. (2006). 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