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
Stock
Bond
Scenario
Probability
Rate of return
Return
Rate of return
Return
Severe Recession
0.05
-37
-1.85
-9
-0.45
Mild recession
0.25
-11
-2.75
15
3.75
Normal growth
0.4
14
5.6
8
3.2
Boom
0.3
30
9
-5
-1.5
Expected return
1
10
5
Variance
68.4
Standard Deviation
18.63
8.27
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 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.
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