Investment Portfolio Term Paper

Excerpt from Term Paper :

Investment and Portfolio Analysis

With the increasing economic downturn in the economy, the need of investment has increased considerable. The potential investors generally foregoes their current leisure and earnings and investment their earnings and expect to earn benefits in future for the same.

For analyzing the investment, we have taken into consideration a hypothetical investor who has $50,000 which needs to be invested in different, in different assets.

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.

Investment is called as 'the current commitment of dollars for a period of time in order to derive future payments that will compensate the investor for (1) the time the funds are committed, (2) the expected rate of inflation, and (3) the uncertainty of the future payments' (Frank Reliey). An investor can be said a person who is making an investment an investor can be an individual, a government body, or a corporation. Investments can be done in different stocks, commodities, bonds, or real estate. The investor focuses on trading the known amount of dollar in the current date with an anticipation of a getting a future benefit in the future.

To design the investment portfolio of it is important to analyze different aspects which are the time for which the funds are being committed for the future needs, the expected rate of inflation and the expected payment that is likely to receive in the future.

Investor Profile and Statement of Objective:

The investor in this case is Mr. X who is 30 years who needs to invest $50,000 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 $1,000. 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.

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 to 70% of the total portfolio along with 30 to 40% of investment in bonds and short-term investments which will include the money market securities which will help in providing adequate returns.

Capital market expectations for stock and bond funds





Rate of return


Rate of return


Severe Recession






Mild recession






Normal growth












Expected return






Standard Deviation



With 70% investment in stock and 30% in bonds, Mr. X is likely to have expected return of minimum 10% and the coefficient correlation will be around 1.5, showing a positive relation between the two.

Investment Constraints:

Risk and Safety Principle: It is important to analyze the amount of risk that Mr. X wants
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to consider. As risk is closely correlated to the returns expected. With high to moderate risk, Mr. X is likely to invest about 60% to 70% in equity market and about 30% in the debt market, mutual funds and money market securities.

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.

The following exhibits bring into picture the different rate of return prevalent in the market. From the past trends we can analyze that the rate of return stocks have increased, with an increase in returns of small company as well large company stocks.

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. (Refer Exhibits).

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.

Economic Analysis:

With the advancement of technology and globalization, there are different regions where investment can be made through different stock exchange which are London, Tokoyo, Asian markets and United States market. After the subprime crisis that had hit the world, we will be focusing on investing in different global markets which will help in maintaining the portfolio.

United Kingdom:

The economy of United Kingdom is the sixth largest economy when measured by GDP, being a member of European Union the trade and economy of UK has increased dramatically. The stock market index is 5718.99, whereas the inflation is 4.2%.

United States:

The economy of United States is the largest and the strongest economy of the world which has major trading and investment companies of the world which are listed in the stock exchange of U.S.. The economy of United States is a market oriented economy which is highly driven by technology, after the subprime crisis several initiatives have been taken by the president that has helped in retrieving the economy of United States. The stock market of United States is one of the strongest with 11193 points.


Considering the global as well as country scenario, we will focus on putting the wealth of Mr. X on equity, bonds as well as money markets. Apart from the UK market there are other markets as well whose rate of bonds and stock are increasing considerably. By investing in different stocks and bonds of different countries the risk pertaining to the portfolio will be minimized.

To have strong flexibility 10% of the investment will be made on short-term investments which is the money market securities, approximately $900 can be invested in the treasury bills of the U.S. government and mutual funds, 20% of the amount will be spend on bonds which will include corporate as well as municipal bonds. We will also focus on investing on Eurobonds and yankee bonds. The prevalent rate of Eurobonds 6.25% .

The 60% of the amount will be invested on different stocks of different companies and…

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