Mr and Mrs Vincent have $50,000 of non-superannuation savings invested in a managed fund operated by Morrison Investments. The fund has equal exposure to each of the following asset classes: Australian Equity, Australian Bonds, Cash, International Equity, International Equity (Hedged), International Bonds (Hedged) and A-Reits. You are tasked with checking the performance of the fund.

* Returns calculations (Completed)

b) Now compare your returns calculations to Exhibit B which is a graph taken from Morrison Investments annual report for this managed fund. Note that your average and the average reported in the annual report use the same set of annual returns. Explain why they are different (your calculated mean should be higher). (3 marks)

(c) Compare the estimates in Exhibit B for Australian listed property and Residential Investment Property. Explain why they are so different. Also explain why the Residential Investment Property return is possibly not that informative from an investment perspective. (6 marks)

* EXHIBIT B

Mean Annual Returns (%) Std. Dev of Annual (%) Returns 10-Year 7.8 Whole Period 21.5 Australian Equity 20-Year 10.2 Whole Period 13.3 10-Year 6.5 Whole Period 6.8 Australian Bonds 20-Year 7.0 Whole Period 10.1 10-Year 4.5 Whole Period 4.4 International Equity 20-Year 5.1 Whole Period 7.8 10-Year 6.8 Whole Period 20.9 International Equity (Hedged) 20-Year 8.3 Whole Period 13.1 10-Year 9.2 Whole Period 17.6 International Bonds (Hedged) 20-Year 9.9 Whole Period 12.6 A-Reits 10-Year 7.4 Whole Period 6.3 20-Year 7.9 Whole Period 11.1 Cash 10-Year 5.9 Whole Period 17.7 20-Year 10.3 Whole Period 12.0 Exhibit B: Gross returns for 10 years to December 2020 Growth managed fund Balanced managed fund* Conservative managed fund* Global listed property (unhedged) Global shares (unhedged) Global shares (hedged) Cash Global bonds (hedged) Australian bonds Australian listed property Residential invesment property Australian shares 0.0 2.0 4.0 6.0 8.0 10.0 Notes: *Only before-tax returns have been calculated. Compound returns are calculated over a 10-year period to December 2020. The returns are equivalent to the per annum compound returns that investors would have received for an investment in the particular asset class if they invested in an equivalent portfolio over the two periods. The Australian listed property measure is based on the returns implied by the S&P/ASX 200 Property Trust (Accumulation) Index. Acquisition and disposal costs, such as brokerage and stamp duty (where applicable), have been factored into the return calculations. Assumptions have been made with respect to the tax treatment of listed property income, including the component of tax-free income (abolished in July 2002) and tax-deferred income. The residential property measure is a population-weighted average return calculated across major capital cities. Increases in value are based on median house prices obtained from the Real Estate Institute of Australia. Data from the Australian Bureau of Statistics is used to make adjustments for capital improvements. Net rental income allows for vacancy rates, maintenance expences, management fees, governance charges, land tax and insurance. Acquisition and disposal costs include conveyancing, stamp duty and agent's fees. All returns are net of costs. Past performance is not a reliable indicator of future performance. Mean Annual Returns (%) Std. Dev of Annual (%) Returns 10-Year 7.8 Whole Period 21.5 Australian Equity 20-Year 10.2 Whole Period 13.3 10-Year 6.5 Whole Period 6.8 Australian Bonds 20-Year 7.0 Whole Period 10.1 10-Year 4.5 Whole Period 4.4 International Equity 20-Year 5.1 Whole Period 7.8 10-Year 6.8 Whole Period 20.9 International Equity (Hedged) 20-Year 8.3 Whole Period 13.1 10-Year 9.2 Whole Period 17.6 International Bonds (Hedged) 20-Year 9.9 Whole Period 12.6 A-Reits 10-Year 7.4 Whole Period 6.3 20-Year 7.9 Whole Period 11.1 Cash 10-Year 5.9 Whole Period 17.7 20-Year 10.3 Whole Period 12.0 Exhibit B: Gross returns for 10 years to December 2020 Growth managed fund Balanced managed fund* Conservative managed fund* Global listed property (unhedged) Global shares (unhedged) Global shares (hedged) Cash Global bonds (hedged) Australian bonds Australian listed property Residential invesment property Australian shares 0.0 2.0 4.0 6.0 8.0 10.0 Notes: *Only before-tax returns have been calculated. Compound returns are calculated over a 10-year period to December 2020. The returns are equivalent to the per annum compound returns that investors would have received for an investment in the particular asset class if they invested in an equivalent portfolio over the two periods. The Australian listed property measure is based on the returns implied by the S&P/ASX 200 Property Trust (Accumulation) Index. Acquisition and disposal costs, such as brokerage and stamp duty (where applicable), have been factored into the return calculations. Assumptions have been made with respect to the tax treatment of listed property income, including the component of tax-free income (abolished in July 2002) and tax-deferred income. The residential property measure is a population-weighted average return calculated across major capital cities. Increases in value are based on median house prices obtained from the Real Estate Institute of Australia. Data from the Australian Bureau of Statistics is used to make adjustments for capital improvements. Net rental income allows for vacancy rates, maintenance expences, management fees, governance charges, land tax and insurance. Acquisition and disposal costs include conveyancing, stamp duty and agent's fees. All returns are net of costs. Past performance is not a reliable indicator of future performance