We will use dividend discount model to adjust the foreign exchange movement. Since foreign stocks pay the dividends with the denominated currency. Typically, the cash flow of the investor is denominated in foreign currency. Due to the uncertainty of the exchange rates, the dividends of the investors will be adjusted based on the movement of foreign currency. Moreover, we will use risk-free interest rate for investor. Based on the data in Table 2, it is revealed that all selected securities are having beta lower than 1. Typically, the selected securities are defensive stocks and defensive stocks are usually less volatile with high beta because they tend to perform better during recession as well being stable during recession. Thus, we select the defensive stocks to protect our position. To spread our investment around the overall portfolio, we select the securities portfolio with the lowest standard portfolio and stock with highest return to satisfy client risk averse preference.

Based on the data presented in Table 3 and Fig 1, the returns of all our select stocks increase from the year 2000 to 2009. With the brilliant performances of our selected stocks from 2000 and 2009, the stocks will perform brilliantly when our clients invest in our portfolio.

TABLE 3: Returns of the 10 Selected Stocks from 2000 to 2009

Associated British Foods

Bunzl

Compass Group

Dieago

Experian

G4S

Pearson

Tate & Lyle

Rangold Resources

Fig 3: Return Performances of Selected Stock from 2000 and 2009

From the data presented, the 0.66% Beta with the 38.1% return reveals that the portfolio selected for investment is portfolio with lowest risks. Our objective is to minimize the Beta and the minimum value of the Beta of selected 10 stocks is 0.4. % and the return is 38.1% as being revealed in table 3 and table 4.

Table.4: Portfolio between January 2000 and 2009

Return

38.01%

Yearly Beta

0.66

Initial Investment Value as of January 2000

£100,000

Initial investment by December 2009

£342,000

Return on the investor fund from January...

As being discussed by behavioral theory, forming a portfolio practice should be based on preference of investor. An investor should create investment portfolio meeting wide range of goals. As opposed by Modern Portfolio theory, the behavioral theory follows each layer where the lower layer is designed to prevent financial disaster and upper layer to maximize returns.
Conclusion

This report creates investment portfolio for Hewins. Based on our data analysis, we are able to recommend the best portfolio for our client based on his requirements. The portfolio selected was able to meet 24% higher return, which was 14% higher than the returns fixed by investors. Since our client is not ready to take high risks, we select stocks with average of 38% yearly returns. The portfolio selected for our client has proven to yield high return and outperforming the index of FTSE 100. We also follow broker recommendation in selecting our portfolio as being revealed in Appendix 1.With the initial investment of £100,000; client investment will yield £342,000 within 9 years.

List of References

Evans, J & Archer, S (1968) Diversification and the Reduction of Dispersion: an Empirical Analysis. The Journal of Finance . 23 (5): 761-767.

Chandra, P. (2008).Investment Analysis (3rd Edition).Tata McGraw-Hill Education. UK.

Investopedia (2012). Beta. Investopedia. ULC.

Mase, B. (2007), the Impact of Changes in the FTSE 100 Index. Financial Review, 42(3): 461 -- 484.

Statman, M. (1987). How many Stocks made a Diversified Portfolio, Journal of Financial and Quantitative Analysis. 22(3):353-363.

Tarasi, C.O. Bolton, R.N. Hutt, M.D. et al. (2011). Balancing Risk and Return in a Customer Portfolio. a. Journal of Marketing, 75( 3): 1-17.