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Report of Investment Portfolio

Write report on investment portfolio explaining following points appropriately:

1. Description of investment portfolio

2. Dividend growth model

3. use of dividend growth model and constant growth model for evaluating share price of equity investment

4. Portfolio optimization


Answer

Portfolio Investment Management

Introduction

With the ramified changes in time, there are several investment options which could be undertaken by the investors to create value on their investment, In order to create portfolio, we will be using equity, debts, bonds, ETF, Gold and real estate options to invest the capital. In addition to this, in order to make efficient investment, there are several investment analysis technique to measure the capital value of these options to determine whether these options are available at undervalued price or overvalued price. In this report, investment portfolio is developed with a view to create value on the investment. The portfolio investment is considered as it helps investors to lower down the investment risk and increase the overall return on capital employed. 

Description of the investment portfolio

The investment portfolio is the collection of the assets owned by the investors or by an institutional investors.  However, most of the investment portfolio, are assembled to pay for retirement and other pre-specified benefit. These are made up mainly of securities such as bonds, stocks, mutual funds investment and exchange traded funds (Eades, & Eades, K.2017).

Assets categories selected for the investment portfolio 

Equity Stock

Equity investment is highly preferable investment subject for the investment purpose due to its high return availability. These equity stock investment is accompanied with the equity investment in blue chip companies in which investors buy the shareholding in the particular companies. In this investment portfolio, Man Group Company has been selected for the investment purpose (Graham,  Leary,& Roberts, 2015).

Debt and bonds

These are the fixed return investment option. However, it give less return to investor due to its less risky nature. It is analysed that debt and bonds are bought by the investors who want to face less risk. It is ideally purchased when market is sluggish and giving less return (Jensen, 2017).

ETF

It is the basket of the stocks which is accompanied with the composition of the index like CNF NIFTY, and S&P 200. It is based on the net assets values of the underlying stocks of trading value (Jordan, 2014).

Gold

It is the investment that is made in the stock of companies which operates in the gold related activities. 

Real estate investment option 

Real estate investment option is related to investing in the funds that has underlying assets land or other plots. It is based on the land values (Lai, & Shad, 2017).

                

 

Portfolio distribution :

 
 

Man Group  

 
 

25.00%

 
 

Bonds

 
 


 

 
 

25.00%

 
 

Gold

 
 


 

 
 

15.00%

 
 

`Real estate

 
 


 

 
 

2000%

 
 

Forward Contract option

 
 

15.00%

 
 

TOTAL

 
 


 

 
 

100%

 

Application of the dividend growth model and constant growth model to evaluate the share price of the equity investment.

In order to compute the share price value of the Man group company, firstly we have to identify the cost of equity (Lazonick, 2017). The capital assets pricing model is the model used to evaluate and determine the theoretically appropriate required rate of return of an assets. It is done to make decisions about adding assets to well-diversified portfolio. by using the CAPM, risk free rate of return, beta, and market risk is used to compute the required rate of return (McLemore,  Woodward, & Zwirlein, 2016).



        

 

Computation of the required rate of return by using the CAPM method

 
 

Risk free rate (A)

 
 

1.4%

 
 

Beta (B)

 
 

0.726213465

 
 

Market Risk rate(C)

 
 

12%

 
 

Required rate of return [A+(B*C)]  

 
 

9.11%

 

Cost of equity would be 9.11%

                                    

 

Computation of dividend growth and market growth rate

 
 

Particular  

 
 

1

 
 

2

 
 

3

 
 

4

 
 

5

 
 

Dividend price (in p)

 
 

21

 
 

23

 
 

25

 
 

27

 
 

28

 
 

Growth rate formula

 
 

 year n dividend / (year n-1 dividend) – 1

 

(Albuquerque, Eichenbaum, Papanikolaou, & Rebelo, 2015).

 
 


 

 
 


 

 
 


 

 
 


 

 
 

Growth rate formula

 
 

not applicable

 
 

9.52%

 
 

8.70%

 
 

8.00%

 
 

3.70%

 
 

Average growth rate

 
 

7.48%

 
 


 

 
 


 

 
 


 

 
 


 

 
 

Next year dividend (in p)

 
 

30.09

 
 


 

 
 


 

 
 


 

 
 


 

 


Dividend growth model 

It is analysed that present value of the stock of Man group could be found by using the dividend growth model. It is the present value of the stocks and expected return dividend and growth rate. It is similar to constant growth model expect its discount the divided at the expected return (Muritala, 2018).


formula for Dividend growth model



(Man Group Company., 2018)

       

 

VS

 
 

= Stock Value

 
 

D0

 
 

= Dividend at time 0 (most recent)

 
 

g

 
 

= Growth rate

 
 

rS

 
 

= Stockholders Required Rate of Return

 



        

 

Computation of the stock in future

 
 

DO

 
 

0.49

 
 

G

 
 

3%

 
 

RF

 
 

9.11%

 
 

Future value of stock

 
 

8.261832559

 



The modern theory is the example of the applied theory. It is the investment and portfolio management that reflects how investors could maximize the portfolio’s investment and expected return for the given level of risk by changing the investment weighted (Norman, 2014).

For instance, by applying modern theory, the overall expected return of portfolio is increased and weighted are determined. For instance, we are having five assets investment portfolio worth $ 1 million and man group offer 5%E return and gold securities investment offer 10% return and other are offering 12%, 15% and 10% return (Poornima, Narayan, & Reddy, 2015).

Therefore it is given as below

    

 

Man group invested: Beta of 1, $250,000 invested

 
 

Gold invested: Beta of 1.6, $250,000 invested

 
 

Forward option invested: Beta of 0.75, $250,000 invested

 
 

Bond invested: Beta of 0.5, $250,000 invested

 
 

Real estate invested: Beta of 0.5, $250,000 invested

 



Therefore, portfolio beta would be Beta = (25% x 1) + (25% x 1.6) + (25% x 0.75) + (25% x 0.5) = 0.96

In order to change the risk of the return, following changes could be made. 

We could shift 5% away from the Man group and 10% from the Bond investment (Rahmandad,  Henderson,  & Repenning, 2016).

More amount would be invested in gold securities.

New beta = (20% x 1) + (50% x 1.6) + (15% x 0.75) + (15% x 0.5) = 1.19

  

Bond valuation 

The bond valuation is done to assess the risk and return associated with this investment. 

                                                                        

 

Bond valuation  

 
 


 

 
 


 

 
 

Find the Price and Duration of a Bond

 
 

Enter the current year

 
 

2019

 
 

Enter the coupon rate

 
 

6.0%

 
 

Enter the term to maturity (years)

 
 

10

 
 

Enter face value

 
 

$1,000  

 
 

Enter the yield to maturity

 
 

6.45%

 
 

Enter number of coupon payments per year

 
 

2

 
 

The bond's current price is

 
 

$967.21  

 
 

The bond's duration is (in years)

 
 

7.616

 
 

The bond's modified duration is

 
 

7.155

 
 


 

 
 


 

 
 

Find the Yield to Maturity

 
 


 

 
 

Enter the coupon rate

 
 

7.25%

 
 

Enter the term to maturity (years)

 
 

10

 
 

Enter the face value

 
 

$1,000.00  

 
 

Enter the current price

 
 

$967.21  

 
 

Enter number of coupon payments per year

 
 

1

 
 

The yield to maturity is

 
 

7.73%

 
 


 

 
 


 

 
 

Find the Price between Coupon Payment Dates (semi-annual coupons)

 
 

Enter coupon rate

 
 

6.00%

 
 

Enter yield to maturity

 
 

7.00%

 
 

Enter face value

 
 

$1,000

 
 

Number of days until next coupon

 
 

90

 
 

Number of days in half-year

 
 

180

 
 

Number of coupon payments

 
 

20

 
 

The price of the bond is

 
 

$959.91

 
 


 

 
 


 

 
 

Find the Actual Rate of Return

 
 


 

 
 

Enter the price paid for the bond

 
 

$1,000  

 
 

Enter the price received for the bond or par value

 
 

$1,000  

 
 

Enter the amount of the coupon payment

 
 

$40  

 
 

Enter the number of coupons received

 
 

20

 
 

Enter the number of coupons per year

 
 

2

 
 

Enter the coupon reinvestment rate

 
 

7.00%

 
 

The actual return from the bond is

 
 

7.86%

 


Portfolio optimization 

                                                                                                                                                                 

 

PORTFOLIO OPTIMIZATION

 
 

Many Assets

 
 


 

 
 

 

 
 

 

 
 

 

 
 

One plus

 
 

 

 
 

Inputs

 
 

 

 
 

Expected

 
 

Standard

 
 

Exp Ret

 
 

 

 
 


 

 
 

 

 
 

Return

 
 

Deviation

 
 

[1 + E(r)]

 
 

Ones

 
 

Riskless Rate (r)

 
 

 

 
 

4.0%

 
 

0.0%

 
 

 104.0%

 
 

 

 
 

Man Group

 
 

 

 
 

8.0%

 
 

20.0%

 
 

108.0%

 
 

100.0%

 
 

Gold  

 
 

 

 
 

9.0%

 
 

20.0%

 
 

109.0%

 
 

100.0%

 
 

Real estate

 
 

 

 
 

10.0%

 
 

20.0%

 
 

110.0%

 
 

100.0%

 
 

Bond

 
 

 

 
 

11.0%

 
 

20.0%

 
 

111.0%

 
 

100.0%

 
 

Forward Option

 
 

 

 
 

12.0%

 
 

20.0%

 
 

112.0%

 
 

100.0%

 
 

 

 
 

Correlations

 
 

 

 
 

1

 
 

2

 
 

3

 
 

4

 
 

5

 
 

1

 
 

100.0%

 
 

0.0%

 
 

0.0%

 
 

0.0%

 
 

0.0%

 
 

2

 
 

0.0%

 
 

100.0%

 
 

0.0%

 
 

0.0%

 
 

0.0%

 
 

3

 
 

0.0%

 
 

0.0%

 
 

100.0%

 
 

0.0%

 
 

0.0%

 
 

4

 
 

0.0%

 
 

0.0%

 
 

0.0%

 
 

100.0%

 
 

0.0%

 
 

5

 
 

0.0%

 
 

0.0%

 
 

0.0%

 
 

0.0%

 
 

100.0%

 
 


 

 
 


 

 
 


 

 
 


 

 
 


 

 
 


 

 
 


 

 
 

Standard Deviations

 
 


 

 
 

1

 
 

2

 
 

3

 
 

4

 
 

5

 
 


 

 
 

20.0%

 
 

20.0%

 
 

20.0%

 
 

20.0%

 
 

20.0%

 
 


 

 
 


 

 
 


 

 
 


 

 
 


 

 
 


 

 
 

 

 
 

Variances and Covariance’s

 
 

 

 
 

 

 
 

 

 
 

 

 
 

 

 
 

1

 
 

2

 
 

3

 
 

4

 
 

5

 
 

1

 
 

4.00%

 
 

0.00%

 
 

0.00%

 
 

0.00%

 
 

0.00%

 
 

2

 
 

0.00%

 
 

4.00%

 
 

0.00%

 
 

0.00%

 
 

0.00%

 
 

3

 
 

0.00%

 
 

0.00%

 
 

4.00%

 
 

0.00%

 
 

0.00%

 
 

4

 
 

0.00%

 
 

0.00%

 
 

0.00%

 
 

4.00%

 
 

0.00%

 
 

5

 
 

0.00%

 
 

0.00%

 
 

0.00%

 
 

0.00%

 
 

4.00%

 





Efficient trade-off line and efficient frontier curve


Efficient trade-off line and efficient frontier curve

Graphical presentation of the weights in the optimal target portfolio 


Graphical presentation of the weights in the optimal target portfolio

Risk avoidance strategies

It is analysed that risk avoidance is strategy to lower down the risk. For instance, if investors want to buy stocks in Oil Company but the oil prices have been decreasing significantly over the months. Then there is political risk associated with the production of oil and credit risk associated with the oil. By using the risk avoidance strategy, he would assess the risk link to the oil industry and avoid staking in the company. This is known as risk avoidance strategy. In this case, if Man group is giving less return due to sluggish market condition then more weighted to investment would be given to other investment option in portfolio (Denis, 2016).

Current trends in portfolio management

There are several trends in the market related to the portfolio management such as life cycle investment plan, better data visualization, and integration with other tools, resources management, and scenario simulation. 

Better data visualization (life cycle investment approach)

This is accompanied with the use of the yahoo finance and other source of data to assess the risk and return associated with the investment option. It shows the diversification in the invested capital due to the changes in the return and give more weighted to other investment options which are offering high return on investment (Sekar,  Gowri, & Ramya, 2014).

Resources management 

Before investing in the particular investment option, investors needs to assess the available resources with the investment options. There is need to set up strong link between the risk and return associated with the investment option. It is very critical to have strong grasp on the resources capacity against the invested capital options. Planning, management and allocation of the capital in the different portfolio options will not only strengthen the return but also lower down the risk with the project. 

What-if scenario simulations

This is the scenario based portfolio investment strategy which helps in identifying the future events and possible issues in the investments. It helps investors to assess the future portfolio risk associated with the project (Vause, 2015).

Conclusion

After assessing all the details and case study, it is concluded that risk and return both are essential while creating the portfolio investment project. It is analysed that in this project, five assets are considered to make investment and proper weighted have been given to create optimum portfolio for this five assets. However, investing more capital in gold would be more beneficial for the investors. 







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