Investment Portfolio

Topics: Risk, Investment, Risk aversion Pages: 10 (3746 words) Published: February 18, 2011
1. Asset allocation decisions
To minimize risk as well as maintain and increase the amount originally invested, I chose to diversify my portfolios by combining stocks, bonds and cash savings in difference proportions. I choose home market (UK market) to invest with the goal of maintaining a balance of income and capital growth. Investment in the UK is not bring high profit and fast but its safe and stable because less risk. Investing aboard will bring high return but the risk high also. Invest international market we may consider some types of basic risk. Initially, it is the change in trade policies, taxation and the regulation of government. Besides, the accounting standards vary from country to country. Differences in accounting practices can be affect to appearance of profitability and influence to the investor’s decision. Moreover, international investing involves securities denominated in foreign currencies (currency exchange risk), therefore, invest in UK market maybe the good choice. My risk tolerance level of 22 is moderate to aggressive (coefficient of risk aversion A=2.5) (Bodie, Kane, Marcus, 2001) and I am looking for safety of principal and growth of capital and accept moderate amount of risk. The expected high returns for this portfolio at least 6% or more. I have decided to allocate my assets among stocks; bonds and cash following charts bellows:

After divide asset allocation, then I am going to conduct investment. It is depend on many factors such as market price, beta, dividend yield, standard deviation, coupon; risk of each security, my portfolio had change to suitable. The detail of each change was attack in appendix1. Base on all the data and calculation, after all, my final portfolio was allocation follow the chart below.

2. Evaluate the performance of portfolio
As we know that invest in stocks has more risks than the other but it expected return is high. I am willing to investment in stocks because making more profit from the capital. Besides, to reduce the risk when invest in high-risk market as stocks, I invest in less risk market as bonds include government bonds and corporate bonds. Government bonds are safety because it is guaranteed by the government, but the returns on these bonds are quite low; therefore, I combine with corporate bonds, which is more risky than government bonds but less risky than stock, to have more return. Moreover, for my emergency fund, cash is the least risky investment of all. Cash was used to put in saving account and invested in short-term fund. For the purpose growth capital, I choose to invest in some type of common securities, which bring high return for my portfolio. Firstly, about stocks, I chose 15 securities in eleven industry sectors include engineering, travel&leisure, equity investment instruments, transportation, household Goods&Home Construction, food producers, software&computer services, Pharmaceuticals & Biotechnology, Media, Financial Service and Health Care Equipment & Services. Expected return for stock is 7.017%. About corporate bonds, I had invested in eight big companies in four sectors as finance, satellite telecom, heavy industry and energy. The expected return for corporate bonds is 6.843%. The total of risky part is 71% (£713,002.07). To maintain income, I invest in government bonds and cash. Expected return for government bonds and cash in the order of 2.28% and 3.52% In my portfolio, it includes both long-term and short-term frames. With a longer period, I am able to accept a higher level of risk. After all, I have the luxury of time and can ride out whatever market fluctuations occur in the short-term. If the market price of my stock falls, I can afford to wait for stock prices to come back up. In the long term, economic downturns are often countered by economic upturns, so everything tends to balance out. With a shorter period, I probably choose a more conservative allocation strategy. In the short...
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