INVESTMENT PORTFOLIO CONSTRUCTION Essay Example

6INVESTMENT PORTFOLIO

Investment Portfolio

Introduction

Investment can be described as sacrifice which an individual can make presently with the hope of deriving future benefits. This sacrifices can either be made by an individual or companies and organization (Frank & Keith, 2016). Two most important characteristics of investment are the current sacrifice and future benefit. Investment is truly a sacrifice for present values for the uncertain future reward. It involves several decisions such as the amount of investment, mix of investment, and timing of investment among other decisions. Investment is concerned with prudent management of various investors’ wealth which is the sum of the current income and the present value of all the future incomes. Financial investments are future commitments of funds to help in deriving income from the interest bearing instruments, dividend premiums, and pension benefits among other instruments. The philosophy of any investment is to maximize profit while reducing risk of the investment mixed (Levišauskait, 2010).

The starting point of any investment is determining the objective of the investment. The objectives are safety, profitability and liquidity. The long and short term objective of the investment should be set to help in achieving the short term objective of the investment (Levišauskait, 2010). The objectives will help in establishing the right investment mixed which will result into the right outcome in line with the objective.

Portfolio Determination

Amount of funds to manage = $2,000,000

The proportion of this $2,000,000 invested in the various asset classes depends on the specified client criteria: Shares, LIC’s and ETPs

Investment in shares: Minimum amount invested in shares = 50% × $2,000,000 = $1,000,000

No specific maximum, although this will depend on the amount invested in shares as a minimum of 50% of this share exposure must be hedged, requiring a purchase cost for index options or maintenance of a futures contract settlement account

In this way, large investment part will go for shares investment due to its stability and risk free kind of investment. The variation in share prices to some extent is risky though they are safer compared with other forms of investment. In this investment analysis the first investment mixed is 50% of the available. The shares will be divided for blue chips companies which will take higher.

Individual company shares:

Maximum = 10% × $2,000,000 = $200,000

Could only invest in around 9 companies at this maximum level

There is no minimum investment amount or minimum purchase parcel size

Exclude brokerage costs for this exercise. Assume that this is being covered externally to the value of the funds invested. This mixed will help in both spreading the risk and investment base in the investment portfolio.

Investment in LIC’s and ETF’s:

Maximum amount invested in LIC’s and/or ETFs = 35% × $2,000,000 =

$700,000

Minimum amount = $0 A’s LIC’s and ETF’s are effectively listed securities just like shares, a maximum of 10% of the portfolio ($200,000) can be invested in any one LIC or ETF

Specific sector or market investment requirements:

Minimum exposure to the US market or economy = 10% × $2,000,000 =

$200,000. This can be achieved through investment in shares (long or short positions), LICs or ETFs

Minimum exposure to the resources sector = $0, but some exposure can be included through shares, LICs or ETFs if justified 2) Short Selling

Selling shares now which you do not own, and buying them back later hoping that the share price has fallen over the period. One requirement for short selling is that you have sufficient cash held in the CMT to repurchase these shares at the end of the investment period. It is important to remember that these short positions are effectively a reduction from your investment portfolio cash flows. Represent additional resources that can be invested in other securities, but need to be matched by an equivalent CMT investment (Frank & Keith, 2016).

Constructed portfolio

Portfolio Mixed

Percentage

Available cash

Portioned

$ 2,000,000.00

$ 1,000,000.00

Classes of share

Common Stock

$ 400,000.00

$ 120,000.00

Facebook

$ 180,000.00

$ 100,000.00

Preferred Stock

$ 600,000.00

$ 180,000.00

Facebook

$ 270,000.00

$ 150,000.00

Investment in LIC and ETF

$ 700,000.00

$ 200,000.00

Debentures

Government Security

From the table, there are both preferred stock and common stock, the table is also composed of government securities and other blue chips companies. Investment is concerned with prudent management of various investors’ wealth which is the sum of the current income and the present value of all the future incomes. Financial investments are future commitments of funds to help in deriving income from the interest bearing instruments, dividend premiums, and pension benefits among other instruments. Therefore, the basis of selecting these investment are as follows:-

Common stock are high risk investment but offer higher returns compared to other investment. This in away help in getting higher investments returns from the companies selected. The security in these invest is selection are stable company with high stability share prices in the market (Frank & Keith, 2016).

Secondly, the preferred shares gives stability and surety of the investment. The preferred shares reduces risk of share price in the investment portfolio. Trends occurring in Australia, such as substantial population growth, significant immigration flows, environmental and climate change reform, significant export growth to specific countries, and implement investment actions aligned with such trends. Therefore, the portfolio will cut across all industry and the portfolio has high level of security (Levišauskait, 2010).

In making investment strategy, it is important for the investor to understand where he or she is starting from and where he or she is heading to since this will help in creating investment objectives. It is also important to invest with the end mind, which is directly related with the objective and reason for investment. The risk management strategy and the end future result.

Reference

Frank, K. R., & Keith, C. B. (2016). Investment analysis and portfolio management.

Levišauskait, K. (2010). Investment Analysis and Portfolio Management. Leonardo da Vinci programme project.