Essay: Money Management and Investment

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[. . .] The paper starts with the analysis of ETF because ETF allows an investor to build a diversified and low cost portfolio similar to buying an individual stock. Moreover, investors can buy and sell ETFs daily meaning that the ETF is constantly updating at every second investors buy and sell shares.

Asset Allocation

Our asset allocation is to balance our risks and rewards by apportioning our investment portfolios based on our assets and according to our goals, investment horizon and risk tolerance. Essentially, three types of asset classes such as cash, equities, and fixed income possess different types of risks and returns. Within an investment environment, there is no universally accepted formula for the asset allocation; however, the consensus among financial professionals is that an asset allocation must provide an investor with investment portfolio that will address the risk appetite, investment objectives and investor's age. However, some critics believe that arriving at a standardize solution for asset allocation can be problematic because different solutions are required for individual investors.

Thus, our investment allocation will involve the diversification of bonds, stocks, and cash to satisfy the risk appetite, investment period and investment objectives of our clients. Thus, my client is ready to invest $100,000 and we are going to mange his assets based on the following factors:

Time Horizon: Our investor is moderate investor and the period for our investment will be between 3 and 5 years to generate revenue from our investment.

Risk Tolerance: We will continue to support our initial investment over three years by anticipating that the investment will yield positive returns within these years. However, we still anticipate that we can record a loss within a year of investment period; we will still tolerate the loss within one year.

Current Income: Our current income is approximately $100,000, and will be used for our investment purpose.

Essentially, my client is planning for the investment period between 3 and 5 years and creating asset categories to satisfy returns that will be comfortable for the period. Thus, we are going to divide our fund on different investment classes, and diversification will assist us to offset the volatility and potential loss that could arrive from investing in a single asset. Taking the advantages of pooling the assets together will assist in taking the advantages of the strengths of all the assets. The table 1 below reveals the strategy we will employ in diversifying our investment portfolio to manage our risks using an efficient asset allocation of the ETF for a risk-tolerance moderate investor. Thus, the ETF will cover a range of sectors, which will allow us to strategically allocate our portfolios.

We use Morningstar EFT screener to select the best performing ETFs that yield high returns within three years since our investor is intending to invest in the ETF between three and five years.

Table 1

Allocation

ETF

Ticker

YTD Return%

3-Year Return %

Trading Volume

Amount

Invested

10%

SPDR S&P (Biotech ETF )

XBI

15.06%

28.35%

503,281

$10,000

5%

ProShares Ultra Russell (1000 Growth)

UKF

12.57%

30.53%

$5,000

10%

3x Italn Trsy (Bd Futs ETN )

ITLT

42.94%

48.97%

3,953

$10,000

10%

Semicondct ( Bull 3X Shares )

SOXL

47.32%

39.04%

99,024

$10,000

15%

ProShares Ultra (Nasdaq Biotechnology )

BIB

20.81%

71.01%

206,149

$15,000

15%

ProShares (UltraPro S&P500 )

UPRO

21.23%

47.21%

1,935,407

$15,000

15%

Direxion Daily S&P500 ( Bull 3X Shares )

SPXL

21.07%

44.56%

1,629,519

$15,000

5%

iPath Long Extended (S&P 500 TR ETN )

SFLA

15.56%

33.55%

$5,000

5%

PowerShares (Dynamic Pharmaceuticals ETF )

PJP

12.72%

32.66%

200,219

$5,000

10%

ProShares UltraPro (MidCap400 )

UMDD

10.75%

34.36%

17,016

$10,000

Source:Morningstar (2014).

Our Return in Dollar Amount After 3 years

Using the Excel for the calculation, our returns in dollar amount for the three-year investment will be $132,978 if we do not reinvest our returns yearly. Thus, if our investor withdraws the yearly returns, the three-year investment with the capital will be approximately $232,978 as being revealed in the Table 2.

Table 2: Allocation

ETF

Ticker

3-Year Return %

Amount Invested

3-year Returns ($)

10%

SPDR S&P (Biotech ETF )

XBI

28.35%

$10,000

$8,505

5%

ProShares Ultra Russell ( 1000 Growth )

UKF

30.53%

$5,000

$45,79.5

10%

3x Italn Trsy (Bd Futs ETN )

ITLT

48.97%

$10,000

$14,691

10%

Semicondct Bull 3X Shares

SOXL

39.04%

$10,000

$11,712

15%

ProShares Ultra (Nasdaq Biotechnology )

BIB

71.01%

$15,000

$31,954.5

15%

ProShares ( UltraPro S&P500 )

UPRO

47.21%

$15,000

$21,244.5

15%

Direxion Daily S&P50 ( Bull 3X Shares )

SPXL

44.56%

$15,000

$20,052

5%

iPath Long Extended (S&P 500 TR ETN )

SFLA

33.55%

$5,000

$5,032.5

5%

PowerShares Dynamic ( Pharmaceuticals ETF )

PJP

32.66%

$5,000

$4,899

10%

ProShares (UltraPro MidCap400)

UMDD

34.36%

$10,000

$10,308

Total

$100,000

$132,978

Average Rate of Returns

41.02%

Sensitivity Analysis

We calculate the sensitivity analysis to determine whether our investment is good. In our sensitivity analysis. We assume that the inflation rate is 3% and the tax rate will be 15%. However, we reduce the rate of return to 20% instead of initial average of 41.02% rate of returns assuming there is a fluctuation in returns. However, our investor will be ready to reinvest $10,000 from his annual returns. Based on the results of the sensitivity analysis, our original investment of $100,000.00 plus our annual investments of $10,000.00 will be worth $201,566.43 after 3 years. The tables 3 and 4 reveal the results of our sensitivity analysis.

Table 3: Input Summary

Years

3

Rate of return

20%

Initial investment

$100,000.00

Annual investments

$10,000.00

Inflation rate

3%

Tax rate

15%

Adjusted annual investment for the inflation?

no

All values after the inflation?

no

Results Summary

Compounded interest return

$10,366.43

Simple interest return

$61,200.00

Total invested capital

$130,000.00

Investment final total

$201,566.43

Table 4: Investment Balance by Year

Year

Annual

investment

Taxes

Net Return

Total

0

$0.00

$0.00

$0.00

$100,000.00

1

$10,000.00

$3,300.00

$18,700.00

$128,700.00

2

$10,000.00

$4,161.00

$23,579.00

$162,279.00

3

$10,000.00

$5,168.37

$29,287.43

$201,566.43

Essentially, the BIB is one of the top performing ETF selected with three-year returns of 71% and its yearly total returns is revealed in the Table 6. The BIB Historical Performances is revealed in the Table 5 showing the increase in the price yearly.

Table 5: Historical Prices

2009

2010

2011

2012

2013

YTD

BIB (Price)

15.56

66.77

23.34

BIB (NAV)

15.81

67.12

23.26

Price (S&P 500 TR USD)

26.46

15.06

2.11

16.00

32.39

7.14

Price (Trading-Leveraged Equity)

63.29

34.28

-18.22

31.48

64.34

15.39

NAV (Trading-Leveraged Equity)

62.39

34.12

-18.23

30.50

63.86

Annual Report for the Net Expense Ratio

0.95

0.95

0.95

0.95

Turnover Ratio

5

8

39

13

Price (Rank in Category)

5

6

2

21

NAV (Rank in Category)

5

6

2

19

Table 6: Total Return %

3-Month

YTD

1-Year

3-Year

5-Year

BIB (Price)

22.46

20.81

60.23

71.01

BIB (NAV)

22.50

20.58

59.81

70.92

Price (S&P 500 TR USD)

5.41

7.78

19.34

17.62

17.55

Price (Trading-Leveraged Equity)

13.76

16.28

37.86

21.51

30.47

NAV (Trading-Leveraged Equity)

13.40

15.93

38.43

21.62

30.46

Price (Rank in Category )

19

37

20

2

NAV (Rank in Category)

17

36

20

2

Source: Morningstar (2014).

The UltraPro S&P500 (UPRO) is another important ETF selected for the investment. The UPRO is one of the most widely used stocks' benchmark. Since 2010, its historical prices are increasing except in 2011 where its prices are negative. Between 2009 and 2013, its price increases from $36.34 to $118.49, and its returns increase yearly as being revealed in Tables 7 and 8.

Table 7: Historical Price

2009

2010

2011

2012

2013

YTD

UPRO (Price)

36.34

-11.88

46.80

19.34

UPRO (NAV)

35.77

-11.49

46.29

19.43

Price (S&P 500 TR USD )

26.46

15.06

2.11

16.00

32.39

7.14

Price (Trading-Leveraged Equity)

63.29

34.28

-18.22

31.48

64.34

15.39

NAV (Trading-Leveraged Equity)

62.39

34.12

-18.23

30.50

63.86

Annual Report for the Net Expense Ratio

0.95

0.95

0.95

0.95

Turnover Ratio

69

70

90

73

Price (Rank in Category)

48

41

22

31

Rank in Category (NAV)

49

42

21

15

34

Source: Morningstar (2014).

Table 8: Total Return %

3-Month

YTD

1-Year

3-Year

5-Year

UPRO (Price)

16.20

21.23

60.88

47.21

47.08

UPRO (NAV)

16.06

21.24

60.87

47.19

47.03

Price (S&P 500 TR USD)

5.41

7.78

19.34

17.62

17.55

Price (Trading-Leveraged Equity)

13.76

16.28

37.86

21.51

30.47

NAV (Trading-Leveraged Equity)

13.40

15.93

38.43

21.62

30.46

Price (Rank in Category)

34

31

16

8

6

NAV (Rank in Category)

34

29

16

8

6

Source: Morningstar (2014).

Overview of the selected ETF reveals that their dividends per share increase yearly. Several benefits that our investor will derive from investing in the ETF fund include:

Tax Efficiency: The tax efficient is one of the benefits of investing in the ETF fund because the investment portfolio will assist… [END OF PREVIEW]

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