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Introduction
There are many types of investments in the market. Some of the types of investments include bonds, property, cash, and fixed interest investments. Different investments have different levels of risk and returns. Some of the risks that face investment include changes in interest rates, and inflation which affects the purchasing power of players in the market. It is also worthwhile to note that the longer the period of returns the higher the risks that investments are likely to experience. This paper compares and analyses the various dynamics in 1-year return and 3-year return investments.
Consider the distribution of 1 year returns
This graph does not follow a bell curve. In the 1 year returns (5% categories), it is clear that there is a huge count between 0-5 %. These returns are not a surety for the investors. It is simply that, for some reason there is a disproportionate number of investments returned somewhere between 0% – 5%. It has nothing to do with investor confidence but, perhaps, the 1 year returns are more volatile. This anomaly is present in the 1 year returns and there is insufficient information to state why. However, the bell curve fails to materialize because the number of counts begins to reduce after 25 %. In fact the level of count reaches zero at about 45percent. This illustrates the fact investors have a given level of confidence in the market. These investors are comfortable investing a lower percent of equities because the risk is lower. Despite the positive outcome that might result from the market, investors are still weary of the fact that investing more would expose them to higher risks if the market trends fluctuate (Elton, 2003). Therefore, the constant departure of investors from the market is one the reason as to why the graph for one year returns is not a perfect bell curve.
Also consider what influences 1-year returns by
- Considering the following bivariate relationships
1 Year return & investment type
In the case of 1 year return and investment type, it is clear that investors are not only interested in the maximization of returns. There are other factors that are in play in their investment. Risk assessment is one of the key considerations that investors in the market make. There are some investments that have low returns but have a higher security. For example, many investors according to the pie chart provided have invested in international equities. Bearing in mind that these investments are in foreign countries, these investments are highly secured. Familiarity of investors with their own Australian market is also another key factor that shapes the choice of investments that is made by investors. According to the pie chart about 18 percent of the investors have invested in Australian equities. These investors have a better understand of the market trends and patterns in Australia compared to other investments abroad. This means that they can be in a position to quickly adjust them if the market in Australia fluctuates. This illustrates the fact that familiarity of the market is an important factor that shapes the choice of where investors place their investments. Still on the topic of the relationship between the type of investments and returns, it is evident from the pie chart that fewer people have invested in cash, property, and capital stable. That is generally because these types of investments provide the lowest returns and, therefore, are also the investment types that provide the least risk. Basically, if you want greater returns you have to accept greater risk. Therefore, if most investors are shying away from these types of investors that show that the market is prepared to accept the greater risk for the higher returns – a market that is risk tolerant more than risk averse. The investment in cash limits people to only one type of investment that may in some cases fail. Many investors look for diversity. Through the diversification of investments, investors can be able to reduce the risks of losses. For example, equities either Australian equities or international equities are diverse. Some of them include government bonds, debentures and other forms of loans. However, cash is not diverse and might make investors more vulnerable to loses. Capital stable is for the purposes of growth. Only stable investors are in process of trying to grow their assets. This accounts for the 8 percent investment on capital stable investments.
1 year return & 3 year return
One thing that is important to note is that some of the investors might periodically reposition their investments based on the prevailing market trends and patterns. From the scatter graph that is chosen for – 1 Year Returns vs. 3 Year Returns – to show how 1 and 3 year returns affect each other (if at all), there was a strong correlation between 8 and 10 percent 3-year return. However, this correlation is not maintained at a higher percentage. It is important to note that the increased investments up to 8 percent 3 year return is motivated by the fact that at that level the level of risk is minimal. However, increased investment above 10percent 3-year return period means that investors are exposing themselves to a higher risk. This is the reason as why investors begin to reposition their portfolio investments based on their assessment of the market trends. Therefore, the lack of a strong correlation on the scatter graph is as a result of the repositioning of investments based on the market trends, the level of returns, and the level of risks that their investments are subject to. It is evident from the scatter plot is that there is far greater volatility with the 1 year returns. The 3 year returns appear more stable – which is what you would expect. There is correlation between the two but as the returns get higher, the correlation is not as strong. This can be seen that as the 1 year and 3 year returns increase the “scatter” on the graph gets wider, which means a looser correlation.
If the dots were all on a very narrow band (as they look when the returns are low) then there is a stronger correlation. As the dots start to scatter about this suggests a looser correlation.
- Extend to consider also the trivariate combination of:
1 year return, investment type, and 3 year return
Conclusion
In conclusion, the returns of a given type of investment are dependent on the prevailing market conditions. The longer a type of investment remains in the market the higher the level of risk that the investment is likely to face. It is clear from the graphs above, for example the pie charts that more people opt to invest in an investment type that has a low risk. Lower returns have a lower influence on the level of investment compared to the level of risk in the investment market. 1 year returns are more “volatile” and, hence, show greater risk.
References
Elton, E. J. (2003). Modern portfolio theory and investment analysis (6th ed.). New York: John & Wiley.
Reilly, F. K. (2011). Investment analysis and portfolio management (10th ed.). Chicago: Dryden Press.
