Task: First analyse your own situation and risk profile (character, life-style, time horizon, objectives, etc), then reflect this is a portfolio of funds or ETF us- ing the examples and providers...

Investment and Portfolio Analysis
Investment and Portfolio Analysis
Investment and Portfolio Analysis
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Investment and Portfolio Analysis
Investment and Portfolio Analysis
Introduction:
Investment is one of the most important aspect that is needed which helps in fulfilling different
future needs of the investor. There are different assets in which an investor can invest so as to
have a future benefits from the required investment. Every investment entails an amount of some
risk which is associated. Investment helps in promising the return of the original amount along
with an adequate return. So, investment is very important as it helps in fulfilling different future
needs of the investor. (Frank K. Reilly, Keith C. Brown, 2008),
Investor Profile and Statement of Objective:
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 important to keep some cash as savings which will help in overcoming
unforeseen emergencies and expenses, good investment opportunities. The cash reserve that will
be recommended to Mr. X will be $1000. For this, we would recommend Mr. X to invest the
major part of cash reserve in the money market securities and mutual funds as they are readily
converted in cash and has minimum risk associated with the same. Considering this, the time
horizon for investment will be a little long along with high risk investment which will help in
attaining above average return on investment.
Investment and Portfolio Analysis
Policy Statement:
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.
Investment Constraints:
Risk and Safety Principle: It is important to analyze the amount of risk that Mr. X wants to
consider. As risk is closely correlated to the returns expected.
Liquidity needs – The liquidity need of Mr. X, will be little higher as he will have high tax
obligation as he have huge inherited wealth which attracts tax which needs to be paid in cash.
Time horizon: There will be different time horizon for Mr. X, one time horizon will last for five
years others will last for more than ten years. As there is high need of liquid cash some
investment will be done for short term as well which will help in meeting his short term needs.
Tax concerns: the tax rate that will be levied will be approximate 35% when Mr. X will receive
the returns from the particular investment.
Legal and Regulatory factors: It is important for Mr. X to take into account insider trading
prohibitions and should focus on building client advisor relationship.
Unique needs and preferences: Mr. X being an adventurous and ambiguous person there are
specific needs and preferences, to cover up his unique needs it is important to invest on short
term and liquid assets.
Considerations for required rate of return are the real rate of return, anticipated inflation rate, risk
premium.
Investment and Portfolio Analysis
Investment Process:
The portfolio of Investor can be said to be a collection of different investment assets. After
establishing a portfolio the portfolio can be updates or rebalanced easily by buying new
securities and selling the existing securities. The Top-down portfolio construction generally
starts with the allocation of assets followed by security analysis. Considering the sharpe ratio
analysis, standard deviation and other statistical factors we can analyze that the best investment
area is Bonds, large stock company and small stock company.
It is important to diversify your portfolio, so it is advised to focus on investing in different assets.
Asset Allocation:
Asset allocation can be said as the process which focuses on analyzing the strategy for
distributing the wealth of the investor among different countries and classes which will help in
providing the best returns by strongly focusing on the attributes and characteristics of the asset
and the returns that are likely to be earned from the same.
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...