Description
Deliverable Length: 1,200–1,500 words
Part 1 Tasks
In general terms, discuss how the following should be taken into consideration when constructing an investment portfolio:
- Age
- Income
- Debt level and assets
- Marital status
- Parental status
- Risk tolerance
- Time horizon
- General economic conditions
Part 2 Tasks
Task 1
Discuss the efficient market hypotheses, and answer the following question:
- Does this hypothesis support active trading or buying a passive stock index fund?
Task 2
- Discuss several pieces of legislation that were enacted to protect against unethical investing practices.
Task 3
To illustrate your knowledge of portfolio construction, design a portfolio based on the following scenario:
- Robert and Susan Jenkins have inherited $200,000. They are aggressive investors with a joint annual income of $100,000, no debt, and an additional $500,000 in assets other than the $200,000 inheritance.
Design 2 separate $200,000 portfolios based on the following scenarios:
- The couple has 3 children between the ages of 9 and 17 years old, and they will use this money to pay for their college education.
- The couple will use the money to help fund retirement in 35 years.
When designing your portfolios, be sure to keep the following in mind:
- Each portfolio should contain at least 3 common stocks, 1 American Depositary Receipt (ADR) that you researched, and 3 bonds.
- Leaving a portion of the portfolio in cash is an option if you feel that is it appropriate.
- Charts and graphs should be used where appropriate.
- Portfolio models should be based on the Jenkins’ demographic profile and time horizon.
Be sure to include the following in your discussion:
- Reasons for your investment choices
- Stock and bond investment risk and return factors
- The security market line
- Beta and standard deviation
- Bond duration and interest rates
Explanation & Answer
Here is the final answer. Thanks
Assignment Title: Portfolio Construction
INTRODUCTION
Understanding of the clients is the first step of the portfolio management service. Based on the
understanding of the clients, Investment policy Statement (IPS) of the client is designed. Based on the
IPS and Long term capital market expectation of the portfolio manager, appropriate alternative
portfolios are suggested for the clients.
UNDERSTANDING CLIENTS AND DESIGNING INDIVIDUAL PORTFOLIO
Before suggesting a portfolio for the clients, it is very necessary for the portfolio manager to
under the clients. There are two approaches including situational profiling and psychological profiling to
analyze the clients and understand the types of clients.
Situational Profiling
Situational profiling helps to understand and categorize the investors based on their age,
income level, marital status, parental status, and other economic circumstances.
• Stage of the Life: The risk tolerance level of a person depends upon his/her stage of
lifecycle. Based on the conventional wisdom, investor in the earlier stage of the life-cycle the investors
have more risk tolerance as they can add funds to their portfolio through employment related income,
and have more time to recover short term market downturn. On the other hand, the investor in the
earlier stage of the life-cycle the investors have more risk tolerance.
• Income Level: Income level of the clients are important consideration to the investment
manager in suggesting assets allocation. Clients with high income level can be suggested aggressive
portfolio, but clients low income level should be suggested defensive portfolio.
• Marital Status: Marriage change investment horizon of the clients due to additional
consideration for spouse need, upcoming children need (education, life support etc.).
• Parental Status: Number of children and children needs largely affect the current and future
income need of the clients, and portfolio required to plan, design, and rebalance accordingly.
• Other Economic Circumstances: Other economic circumstances including current debt level,
wealth level, special need etc. have effect on the clients ability to take the risk, and sustain portfolio
return volatility.
Psychological Profiling
Psychological profiling helps to ...
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