Investment Management After Holding a Meeting Essay

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Investment Management

After holding a meeting with our client named Robins Hewins on the January 1st 2007, our organization presents the client the best performing portfolio that we believe will suit his requirements. NYZ Investment Fund will manage the investment portfolio of our client with initial investment of £100,000 starting from May 2012. Classification of our client reveals that Robins Hewins is a risk averse investor, and would like to achieve a return of not less than 8% per annum from his investment. While investor is enthusiastic in investing his money in our investment portfolio, however, the client is not ready to put his money into a fund unless he is fully satisfied about how his investment will be created and will be managed. The construction of the portfolio will take into account the costs of maintaining and managing the portfolio. More importantly, the portfolio that we will present to our client will be well spread over the market sector to achieve market gain. To construct the investment portfolio for our client, we use Markowitz Ian portfolio theory. The weekly share prices of FTSE 100 index and FTSE 100 shares from January 2000 will be used to construct the client investment portfolio. FTSE 100 consists of 100 highest capitalized firms being listed in the London Stock (LSE), and represents 80% of LSE market capitalization. (Mase, 2007).

Based on the client request, we present the well-prepared investment portfolio that we believe that will meet our client's requirements while taking into account the client financial strength and his risk aversion. We assume that the risk free rate to be constant at the rate of 4% per annum.

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Method Employed to Construct the Portfolio

This section presents the strategy that NYZ Investment will use to assist our company to sell the investment portfolio to client. With respect to the client risk aversion position, it is strongly recommended for clients to take a non-active strategy and investment in our fund. Emphatically, our index provides low turnover, a good diversification, and considerably low management fees for our clients.

Diversification

TOPIC: Essay on Investment Management After Holding a Meeting With Assignment

We use the Markowitzian portfolio theory to provide the investment guideline for our client. The portfolio theory attempts to maximize investment return and minimize risks using diversification strategy.

"Markowitz measures risk using the variability of the price of the asset, which represents a good proxy for the probability of encountering an unexpected outcome. The risk and return associated with the cash flow of each customer can be computed using purchase history data. Historic analyses are based on the assumption that the future will be like the past." ( Tarasi, 2011 P. 5).

The Markowitzian portfolio theory uses the concept of diversification with the aim of selecting a collection of investment assets that are characterized with lower risks. From the portfolio theory, risk-return portfolio profile could be optimized by diversifying the investment portfolio. (Chandra, 2008). Using this theory, we spread the wealth towards 10 stocks that have been carefully selected from FTSE 100. We are diversifying the investment portfolio by selecting 10 stocks from different stocks from the pool of 100 stocks. This strategy will allow us to spread our investment over large number of stocks on different market sector. By well diversifying the investment portfolio, we are thereby minimizing the risks. Statman (1987) argues that an investor needs to manage the risks associated with portfolio before committing the funds into the investment, and the risk declines as the number of different stocks increase. Evan and Archer (1968) also support the argument by pointing out that, the risks decrease as the number of different stocks increase. Evans et al. (1968) use mathematical relations to demonstrate that there is a phenomenon of risks reduction with additional security added to the portfolio. With minimum of 10 securities added to the investment portfolio, there is a decrease in the risks associated with the investment portfolio. Typically, 51% of investment risks are eliminated by increasing securities to 10. Despite Evan et al. contribution on investment portfolio, the random stock selection option that Evan supports reveals the shortcoming of his argument.

The portfolio of this proposal is well diversified since we systematically choose the stocks from different industry to reduce the risks associated with specific sector or specific stock. The portfolio risks are also reduced by choosing stocks with low or negative correlation, which have been calculated among all stocks in the FTSE 100.

The investor will enjoy several advantages from our investment suggestions.

First, the investor will enjoy excess returns from low stocks correlation.

Second, the investor will be able to avoid the risks from the diversified portfolio.

Additionally, the investor will be able to eliminate transaction costs by investing in our portfolio, which normally results from insufficient information.

Stock Selection Strategy

Diversification

Portfolio was constructed following our stock selection strategy. The strategy we use in the stock selection is by analyzing all different stocks listed in FTSE 100. We do not discriminate any industry because we analyze the stocks found in all industry. After analyzing the stocks in all from FTSE 100, the next most important step was to select 10 performing stocks from our portfolio. The strategy we use to select the best performing stock from every industry. The parameters we use are as follows:

Beta

Beta is one of the most importantly tool to measure the equity market volatility. Beta reveals the relationship between the financial instrument and financial market. On the other hand, Beta measures the stock's risks relative to the over risks in the market. Typically, equity with high Beta will underperform when market is going down. For example, if Beta of equity is 2, the equity will significantly underperform when market is going down. Our strategy was by calculating the Beta value of all the stocks selected using the yearly returns between January 2000 and December 2008. We then compare our stock yearly price movement to the yearly price movement of FTSE 100. Based on our analysis, we prefer the Beta, which is less than one.

"Beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market." (Investopedia 2012 P. 3). Choosing a better greater than one will be riskier for our investor.

Return on Assets (ROA)

We use the return on assets to measure the rate of return to satisfy the client requirement. We select stocks with high ROA based on the believe that the increase in the company assets lead to high return.

Return on Capital Employed (ROCE)

Although, we prefer selecting the stocks having the highest ratio of efficiency and profitability, however, we still have to consider the risks associated with the stocks before selecting the best performing stocks for our client is since our client is a risk averse

Dividend Yield

Return is the most important parameter that we follow when selecting our stocks. We take into account of dividend yield as well as taking into account of the risk free rate and the Beta of the stock. We select the stocks with excess returns and having the lower risks. In the other word, we select stocks which returns are greater than risks associated with the stocks. We identified the stocks having excess return selected from every industry. (See Table 1).

Table 1: Parameters of all the Stocks

COMPANY NAME

Dividend Yield

Return on Capital

Employed (ROCE)

Return on Assets

BetaBeta

Admiral Group

3.11%

97.46%

8.46%

1.0

Aggreko

0.95%

27.94%

14.68%

1.1

Amec

2.83%

34.96%

9.45%

1.3

Anglo American

2.06%

17.63%

8.52%

1.6

Antofagasta

1.12%

29.19%

10.56%

2.1

ARM Holdings

0.59%

29.43%

8.67%

1.1

Ashmore Group

3.75%

57.92%

27.98%

1.2

Associated British Foods

2.08%

13.12%

5.30%

0.5

AstraZeneca

6.35%

84.36%

18.90%

0.8

Aviva

8.51%

9.64%

0.07%

1.7

BAE Systems

6.42%

0.00%

5.37%

1.0

Barclays

2.79%

6.96%

0.19%

2.4

BG Group

1.08%

16.83%

6.90%

1.3

BHP Billiton

3.37%

37.56%

22.98%

1.6

BP

4.14%

23.93%

8.77%

1.0

British Land Co

5.51%

13.05%

11.57%

1.1

British Sky Broadcasting Group

3.60%

56.62%

15.13%

0.7

BT Group

3.41%

25.30%

6.38%

1.1

Bunzl

2.64%

48.41%

4.52%

0.8

Burberry Group

1.28%

37.82%

15.27%

1.4

Capita

2.94%

71.73%

6.73%

0.6

Centrica

4.91%

14.98%

2.15%

0.7

Compass Group

3.03%

7.74%

0.7

CRH

4.17%

7.55%

2.76%

1.6

Croda International

2.58%

61.12%

16.79%

1.0

Diageo

2.66%

31.77%

9.61%

0.6

Experian

1.81%

0.00%

7.92%

0.9

G4S

3.01%

27.70%

3.22%

0.7

GlaxoSmithKline

4.99%

62.31%

12.81%

0.5

Hammerson

4.07%

7.98%

5.37%

1.2

Hargreaves Lansdown

2.81%

96.30%

28.96%

1.4

HSBC Holdings

4.76%

12.68%

0.66%

1.2

ICAP

5.36%

49.73%

0.24%

1.3

IMI

3.24%

71.85%

11.57%

1.8

International Power

2.72%

8.72%

2.85%

0.6

Intertek Group

1.35%

42.31%

7.99%

1.0

1.89%

50.63%

8.46%

1.4

Johnson Matthey

2.00%

17.71%

5.61%

1.4

Kazakhmys

2.01%

15.71%

7.93%

2.2

Kingfisher

2.97%

18.94%

6.64%

1.0

Land Securities Group

3.95%

14.14%

11.64%

1.1

Legal & General Group

5.22%

12.39%

0.22%

1.5

Lloyds Banking Group

0.00%

0.00%… [END OF PREVIEW] . . . READ MORE

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