Two case studies from end of chapter in the textbook would be informed later. Eachcase is worth 10 marks (Total 20 marks. Weight: 20%). (Word limit 1,500 words).

Case 11.1
Solution 1
Portfolio management provides a scientific way by which investors can maximize its return
by investing in different class of investments. In this exercise, we are also trying to maximize
return of TOM by investing in different investments as per his investment goal and risk
appetite.( Sinquefeld,2008, pp-45-57) Hence, the whole investment policy of this exercise is
based on the following investment objectives:-
1) Risk appetite of Tom which is very low
2) Financial goal i.e. to save fund for the retirement
Hence, from the above objectives it is clear that the fund which will meet above two targets
will be good for Tom. From different type of funds, following are suitable for Tom:-
1) Bond which composed of risk free long term bonds issued by federal with 4 to 5 %
return with very low risk.
2) A mixture of 80% bond and 20% regular dividend paying company stock with 6 to 8
% average return and modest risk.
From the case it is clear that the risk appetite of tom is very low so it is better to go for the
first one because here the long term bonds carry no risk with modest 4 to 5% return. It also
pays regular coupon payment which might help tom in getting regular income. The second
one is bit risky because stock Market is a risky investment which is used by investors for both
long term and short term trading depending on one’s risk appetite and time period for which
he wants to invest in the stock Market.( Sinquefeld,2008,pp-47-55) Hence, it is good for both
type of investments if your risk appetite is high and its success depends on the acumen and
skills one possesses to take maximum advantage. If we consider the history, we found that
speculators with high risk appetite prefer second type of investment whereas investors with
low risks prefer the prefer type of investment where they invest in fund containing bonds in
its portfolio basis of fundamentals of the country. ( Sinquefeld,2008, pp-53-65)
The second one is also risky from the point of view that many people called Stock Market as
the biggest casino of the world because it changes the fortune very quickly. But here Tom
wants low risk and modest return fund so first one will be better which he use to withdraw
regularly for his retirement after the age of 65. However, the second fund selection can be
made less risky by selecting the fund which invests in large no. of different stocks so that the
systematic or firm specific risk can be diversified. (Swensen,2000, pp-110-115) However,
there still lies non-systematic risk which is not possible to be removed. But one can...