Answer To: Nursen Cesur Ozatay grade report (#75046) Money Management - Final Assessment The Task First analyse...
David answered on Dec 24 2021
Investment and Portfolio Analysis
Investment and Portfolio Analysis
Investment and Portfolio Analysis
Student’s Name
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Investment and Portfolio Analysis
Investment and Portfolio Analysis
Introduction:
In this competitive world and changing economic and financial conditions, investment is
considered to be one of the most important aspect with which the individual is able to plan its
future and its financial resources properly and adequately. It is important for the individual to
design proper investment which gives adequate returns to them, for this it is important for the
individual to analyze different resources and aspects on the basis. (Frank K. Reilly, Keith C.
Brown, 2008),
Investor Profile and Statement of Objective:
For the investment and portfolio for the project, I have assumed myself as X. The investor in this
case is Mr. X (I have denoted myself as Mr. X) who is 30 years who needs to invest $50000 in
different investment options which will give potential returns in the near future. Different aspects
are considered for defining the policy statement will take into consideration:
Insurance: It is important to have a life insurance cover of Mr. X. Insurance will also help in
serving different purposes which can especially benefit once Mr. X is retired as after retirement
he can receive the surrender value of insurance taken. We would recommend Mr. X to opt for
universal and variable life insurance along with the health insurance. Insurance will also help in
mitigating different risks for unforeseen future. Insurance will also help the investor in mitigating
the risks if the house gets damage and from theft.
Cash Reserves: It is for the individual to have adequate cash reserves so as to overcome
unforeseen emergencies and expenses, good investment opportunities.
Investment Constraints:
There are different investment considerations that need to be addressed by the individual which
includes Risk and Safety Principle, Liquidity needs, Time horizon, Tax concerns, Legal and
Regulatory factors and unique needs and preferences of the investor.
Investment and Portfolio Analysis
Considerations for required rate of return are the real rate of return, anticipated inflation rate, risk
premium.
Asset Allocation:
Asset allocation is the procedure to distributing the wealth or the investment in different classes
which will help in providing adequate returns. The asset allocation is usually done differently for
different investors as per their needs and requirements.
Investor Objective: Invest in different moderate to high risk investments with a strong focus on
investment in equity which will include foreign as well as domestic equity exposure which will
range approximately 60% equities, 15% bonds, 10% Mutual funds, 15% of investment in cash
market or the short term investments which will include the money market securities which will
help in providing adequate returns.
The investment will be with a benchmark of constituting 10% equities, 15% bonds, 60% Mutual
funds, 15% cash reserves and gold.
Financial Market and Economy:
World Economy:
In 2009, the world had undergone major financial crisis which has affected the stock market and
the economy of the whole world. After the financial crisis, the economy was able to recover, The
GDP of the world reached the all-time high in last ten years but have decreased incredibly after
that. The global economy is expected to 3% per year, the projected growth for 2012 is 3.5%
which is going to increase to 3.6% from 2013 to 2016, which may further decrease to 2.7% from
2017 to 2025. The different economies across the worlds will witness different growth, the
emerging economies are expected to have a growth rate of 5.6% in 2012 and 3.3% from 2012-
2017. There are different challenges that are faced by the world which includes increase in
productivity, increasing unemployment, because of which the GDP of the world is deteriorating.
Investment and Portfolio Analysis
Source: http://www.rba.gov.au/chart-pack/
Financial Market
Financial markets are the drivers of investments and money management. Financial markets are
a crucial component of an economy. The capital markets allow securities trading which
complements the traditional lending institutions. The former provides both equity (risk capital)
and debt (loan capital) instruments. With the help of both these alternatives, the market is
enables mobilization of savings and channels funds to investors who seek capital for long-term
investments. The financial intermediaries like banking institutions, investment bankers and
venture capitalist provide the nexus between market and public savings. A well-functioning,
efficient financial market is essential in promoting economic growth as well as improved
utilization of resources and diffusion of technology. (Jalloh, M 2009)
The efficient functioning of financial markets require interaction of a variety of players such as
the Dealers/Stockbrokerage Firms, Company Registrars, Mutual Fund, Issuing Houses,
Investment Bankers, the Stock Exchange , the Security and Exchange Commission (which
regulates the activities of the Exchange), the Central Security Clearing and Settlement (CSCS)
system, the Investing Public, Accountants (Auditors ) and Solicitors. Each of them has a
specified and well decided role to play in the system. For instance, stock brokers are licensed
members who buy and sells financial securities for their clients/customers; registrars keeping
http://www.rba.gov.au/chart-pack/
Investment and Portfolio Analysis
records related to the ownership of a company’s securities; stock exchange are licensed
institution that provide a platform for buying and selling transactions of financial securities. The
SEC is the government watchdog and plays the regulatory and the supervisory role for these
players.
The markets have affected by the macroeconomics of a country. There are various factors that
impact these markets in a variety of ways. Some of the macroeconomic linkages of the financial
markets are assessed below.
Economic activity of a country indicates its economic health and the complex interactions
between factors such as the business cycles, monetary decisions by the Federal Reserve, changes
in the monetary supply, along with the microeconomic factors such as earnings and output to
determine the securities pricing and trading, which are again a reflection of the macroeconomic
situation of a country.
The macroeconomic factors have a direct bearing on the operations of industries. They can be
used by the government to bring changes in demand and supply which will cause the industries
to adjust to these market forces and hence will affect the financial markets. Some of the most
important macroeconomic factors that can have a pronounced effect on the markets are as
follows:
Inflation/Deflation: This refers to a situation in the economy which is characterized by constant
increase/decrease in the prices of goods and services. As a consequence, the purchasing power of
the currency of a country deteriorates. A very high degree of inflation or deflation is not good for
the progress of the country. Inflation usually affects the security prices negatively. This is
because the government increases in interest rates as a response to curb increasing inflation. So
the interest-rate sensitive equities in particular have this effect. On the other hand, deflation
causes prices to decrease persistently because of slowing demand. This causes increase in
purchasing power and fixed income securities become more attractive.
Monetary policy and Fiscal policy are government tools to regulate the economy and maintain its
balance. They directly impact the money circulation in the economy and the business activity
Investment and Portfolio Analysis
thereof thus affecting the financial markets. When the Fed wants to expand the money supply, it
buys securities from banks, which receive direct credit in their reserve accounts.
Monetary policy affects the money supply and the private sector efficiencies. It attempts to
manage price levels in an economy by controlling the quantity of money circulated. A stable
price level allows businesses to chart out clear future plans for growth. The economy grows
steadily by investing in such businesses.
For increasing the money supply, government buys securities from banks, which now have more
money to loan out at lower interest rates. For decreasing the money supply, government sells
securities to the banks and thus reduces their reserve balance. This leaves banks with less money
for credit activities and higher interest rates for loans. The amount and the cost of credit
available, affects the businesses.
Fiscal policy deals with changes in the level as well as allocation of the economic resources. It
revolves around the decisions related to budgets of government spending, money raised by the
government through taxes and budget deficits or surpluses. The government attempts to curb
unemployment as well as inflation by adjusting the level of demand for goods and services by
changing the taxation and government spending variables.
Fiscal policy can be either expansionary when the economy is at its low and businesses are
sluggish. The expansionary fiscal policy entails increasing government demand and reduction in
taxes to help stimulate the economy. A contractionary fiscal policy is rolled out when businesses
are in full...