In continuing our theories on capital structure – an important component which isn’t discussed in the last post is the assumptions of capital market theory which builds quite well onto the Markowitz portfolio model and the assumptions of the Markowtiz model – but with some additional add ons which are unique to capital market theory. Importantly, this post assumes that because capital market theory effectively derives its roots from portfolio theory, you understand risky assets and the efficient frontier. Additionally (and indeed importantly) it is also assumed that you actually want to maximize your utility in terms of risk and return. This is of critical importance to capital market theory – choosing portfolios of risky assets on the efficient frontier at such points that your utility is tangential to the frontier. This, of course, is what Markowitz termed the efficient investor.

Ok – so what are the assumptions of Capital Market Theory (CMT)?

The assumptions of Capital Market theory are primarily eightfold and I will attempt to explain them below.

1. Everyone is an Efficient Investor – It goes without saying that everyone wants to be a efficient investor. No investor wants economic loss and all investors attempt to invest with a relative return correlated to their risk portfolio. The exact location of an investor on the efficient frontier is relative to this specific risk-return utility function and this is what return primary depends on.
2. Same Probability of Return - We must assume that all investors have the same probability distribution for future rates of return. That is, all investors want homogeneity – the same or similar future rates of return which again must be correlated to the risk-return profile.
3. Risk-Free RFR - An important assumption for the purpose of pure capital market theory is that all investors can lend or borrow money at the risk-free rate of return.
4. No Taxes or Transaction Costs - Importantly, CMT assumes that there are no transaction costs or taxes associated with the purchasing or selling of assets. The model cannot incorporate these features because they are essential dynamic measurements.
5. Fractional Components - CMT assumes that all investments can be purchased as fractional elements. That is, any investment can be purchased as a fractional component which allows the model to be illustrated graphically on a curve. Evidently, this is not possible in real life (1/4 of a share for example) but for the purposes of CMT it is assumed that it is possible otherwise exponential graphing wouldn’t occur.
6. No Inflation - There is not any inflation or changes in underlying interest rates in the pure world of CMT assumptions – there is only a reasonable initial assumption which can be modified later. Future changes cannot be modelled or rather – are not encompassed within the model.
7. Investments are purely risk-efficient - That is, that investments have a perfect risk correlation which infers that all capital markets are in equilibrium as each investment has a respective risk ratio which perfectly matches it.
8. Time Line - All investments in the CMT have a similar time-line across which they are measured. This infers that all investments are modeled within a relative time-space continuum. If investments were not measured across a similar time period then evidently other variables would change such as the measurements of risk and so forth.

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It’s finally starting – one of the most popular posts on SmallStocks has long been the guide about Unfair Bank Fees and Charges – a tips and pointer article I wrote about how to get those ridiculous bank fees back when your pay packet has arrived late or your gym membership has been debited early and the bank charges your a hefty sum – just to let you know whose boss. Banking fees – and the cost associated with such fees – are a ridiculous burden that we all have had to face for far too long in the Australian banking industry. The thought of being charged – a $30 to $45 fee – for mistakenly going into debit on your standard cheque or savings account is absolute highway robbery and I myself – have long protested against banks being allowed to charge such ludicrous fees.

My main irk was associated with the fact that not only do the banks and credit unions charge you interest on the amount your account is in debit – typically as high as 14% even though this is no where near their overnight cash interest rate – they then charge you as much as $46 as “punishment” for going into debit. I somewhat reservedly understand about the interest expensive on the amount you are in debit – since the bank is after all “lending” you this money and they should not have to pay interest for you – but the additional charge was always something that was completely unnecessary.

For too long, banks have simply been willing to sacrifice brand equity for the income they rake in for the charging of such fees – with the most customer complaints always stemming from unnecessary fees and the banks unwillingness to return them. The consumer advocacy argument of “you have a choice” – in my mind – was always a weak argument. People have banked with most institutions for many years, and the thought of changing all your accounts in addition too the fees associated with such a process – turns most people off.  People just accepted the fees, and then go and tell all their friends how much they hate their bank.

Now the landscape is finally changing today with the annoucement from the National Australian Bank (NAB) that it is abolishing overdrawn account fees from all NAB personal transaction and savings accounts from 1st October 2009. The result – more than 700,000 NAB personal transaction and saving accounts that will never have to pay – or even better – sit on the phone for 90 minutes with increase heart rates, blood pressure and angry temperament ready to blast the phone operator …. who is now based in India and cant understand what you are saying as its not on their “reader sheet” of things to say to “calm angry customers”.

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It happens to all of us – you sell some shares, get excited, the money gets deposited into your account and … all the documentation gets thrown in a drawer. The attitude of “oh, I’ll remember it’s there” comes into play and life moves on. Now of course, its tax time and your accountant asks you – “So have you disposed of any shares this year?” and you say “Yes, I have”. The next logical question is “OK, so can you send me the trading information for capital gains purposes?” and then you think to yourself “oh shit, we threw out that desk!!!”. Yep, it happens to the best of us. So, what to do ?

Well, not all is lost. The Australian Taxation Office requires that you have to pay tax on any capital gain (or claim a capital loss) on what you make when you sell shares or you give them away. It is critical that you provide this information in your taxation return – otherwise you are effectively avoiding tax. Of course, why data sharing services haven’t been introduced into the ATO so this information can be automatically extracted is beyond me – so for now, it is up to you to record this information.

What records do you need?

So the records that the ATO generally requires to work out your Capital Gains Tax (CGT) when you dispose of shares or give them away is the information that is given to you by the company that issued you the shares, your stockbroker or some online trading facility that you transacted over. It really is critical to keep this information handy and not to store it away and forget about it. The most important records to have include:

• date of sale
• date of purchase
• any broker or commission paid
• amount paid for purchase
• stamp duty paid
• amount received on sale

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So the 2009-2010 Budget has been released and was there an absolute firestorm in parliament or what ? It was amazing to watch Question Time today and one really wonders how anything is done at all over all the shouting. So all in all, it is clear that the main two words which come out of the budget are “spend” and “debt” – these are the two words that every media outlet and newspaper have smeared all across the front of their websites and papers over the last few days. So what does it all mean ? Well, I have prepared a brief breakdown.

Overview

This budget is all about spending, and spending big. The Governments position on this is that it needs to spend in order to reduce the levels of unemployment across our country and sustain economic growth in the short-term. The Government has proposed around $22 Billion to be spent per:

• $3.4 Billion on roads
• $4.6 Billion on rail
• $3.5 Billion on clean energy
• $3.2 Billion on hospitals
• $2.6 Billion on Universities
• $4.7 Billion on Broadband

The so called – big ticket items – were the significant increase in the aged pension , the tax cuts which were delivered and a new carers payment scheme which was introduced in addition to a paid parental leave scheme. Of course, this was negated by increased taxation on superannuation and a tightening of rules associated with superannuation for higher income earners, increased means testing for middle income earners and the dreaded increase in the pension qualifying age to 67 – ouch. These measures are meant to increase our GDP (Gross Domestic Product) by around 0.75% – or approximately $6 Billion – and lower our unemployment by 1.5% for the 2010 year. The Government has contended that without these measures we would be pushing 10% unemployment.

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