Construction of Investment Portfolio

reflexion of Investment PortfolioTo Mr Bernard RiemannFrom Investment ManagerDate 28 November 2007Subject braid of Investment PortfolioOverviewThe investment funds portfolio recommended is based on the discussion with you. The key points that emerged from our discussions argon as follows integrality investment required to be do is 1,000,000The portfolio should embarrass at least 5 equity securities and at least 3 debt securities. Besides these some other investment products may also be include. The portfolio break up should be at a minimum impartiality investments 400,000Investment in Debt securities 200,000Investment in other products 350,000Cash 50,000You do non want to invest in very perily investments, besides ar go awaying to accept some additional risk if thither is adequate compensation in the form of increased retrogresssInvestment allow be made for a speciality to long term. Two months be considered as sensitive to long term.Investment in the recommended portf olio willing be made on 28th November 2007Your number wealth is approximately 500,000. This includes blood line 3,000,000Residential Property 800,000 adds to Relatives 200,000Amounts proposed to invest 1,000,000Suggested PortfolioYou are advised to adopt a lower risk and a more diversified institutional approach. This will require you to earn a portfolio of assets. In general, riskier investments, such as equities offer up the best returns everyplace the long term, but they are also about volatilisable. However, beca engage you are only planning to invest in short to medium term, you will not be much affected by the unpredictability. Nevertheless(prenominal), combining different types of investment in a portfolio can help you derogate and variations especially if the securities in your portfolio are non-correlated (i.e. their worths coin independently).On the basis of in a higher place information and the investing assumptions (Refer appendix A), the most appropriate as set fashion model for you appears to be Medium RiskIndividual securities and investment productsYou are thusly advised to make your investments in the securities given in the table infraAsset ClassInvestmentSectorAmount ()Percentage of inwardnessEquity Securities (FTSE speed of light)British AirwaysAirlines76,2607.6%Land Sec (R.E.I.T.)Real Estate94,2509.4%BarclaysBanking78,6007.9% sharp-witted GroupTechnology77,4807.7%Morrison Super commercializesRetail73,2557.3%Debt Securities and Funds9% Treasury Loan bring together 2008Bond100,00010%SWIP antisubmarine sumptuous Securities100,00010%HSBC Gilt Fixed Interest Inc150,00015%New Star UK Property A AccProperty Funds150,00015%Cash100,15510%Total1,000,000100%(Source hick finance)Rationale for the selection of each security/product(Refer addendum B)Equity SecuritiesThe equity securities are all FTSE 100 securities. These securities belong to volt diverse vault of heavens, namely, Airlines, Real Estate, Banking, Retail and a sunr ise sector of Technology. These sectors are not correlated thus reduce the portfolio risk.The rationale for selection of these and not other FTSE 100 securities areBritish Airways Plc. is the leading airline in the United Kingdom and is champion of the biggest in the world. It also has holdings in other airlines, such as the Australian, Qantas, and the Spanish Iberia. In addition the airline has belatedly signed a partnership with the American Airlines and companies such as chinaware Pacific Airways and Finnair. Therefore, it has bright prospects. Though the price rationalise in the medium term is pessimistic volatility has been increasing during last month.The Property sector is represented by Land Securities. Land Securities has a huge step of real estate all everywhere the UK. It manages a series of properties. The association has played a major role in transforming cities such as Birmingham, Canterbury, Bristol and York by working closely with the city authorities, and w ith the support of the government. The market is bearish but volatility is increasing. One may make massive gain in the short term.The banking or financial sector is represented in the portfolio by Barclays. Barclays began its operations in the 17th century in London. It is an world-wide bank with 800 global branches. It is a strong entity in 60 global countries, in Europe, the United States, Africa, and Asia. The group remains a very big member of the UK banking community. Even though the Banking sector may have not performed very well in the past, its prospects are good. An investment portfolio should have at least one category of securities from this sector. Though medium term price trend for Barclays is bearish the boom conditions may benefit the portfolio as its volatility has been increasing.Sage group represents the sunrise sector in the portfolio. It is a British compevery that is considered a leader in management software sector. It has its social move in all major Eu ropean countries and India, South Africa, Australia, the Middle East, and sum America. Sunrise industry presents extremely good prospects.The Morrison Supermarkets Group represents the retail sector in the portfolio. The group specializes in supermarket distribution, offering quality products and increasing diversity. It has purchased Safeway, an possessor of more than 500 supermarkets in Great-Britain. Medium term price trend is bullish. This market keeps a relative behaviour greater 16.232 than FTSE 100 INDEX. excitableness has been increasing during last month. It is a good time to make usefulness in the short term.Debt Securities/Funds9% Treasury Loan Bond 2008 are Gilt edged flummoxs issued by the UK Government that will suppurate in 2008. These draws offer the investor a fixed interest rate of 9% for a predetermined, set time. These bonds are especially recommended as you require a fixed, predictable income. These bonds also ensure a guaranteed return of capital. Though these securities standardised shares are prone to fluctuation, they are much more secure. Though the bond has a redemption date (July 2008), it can be sold at any time for the present market price. Investors are not laced down and there are no penalties for selling the argument. Gilts prove to be the best option in times such as the accredited times when interest rates are high and look believably to fall. Due to a decline in the interest rates the order of the stock will rise and can be sold profitably.SWIP Defensive Gilt Securities and also HSBC Gilt Fixed Interest securities have been included in the portfolio as they will provide a regular income. The investments do not have a minimum or maximum investment period.New Star UK Property is another place where investment should be made. Though in recent times a few largish fund holders have got out of UK commercial property funds, for the next one year the fund is expect to give more or less stable returns.As you want a ret urn of 500 per month, the portfolio requires that 100,155 should be deposited in the bank. This will carry an interest of 5.75% (at the current rate) and will decorous your requirement for 500 per month for the tuition fee of his niece.Expected returns of the portfolio over the 2 month investment periodThe portfolio is expected to give a return of 1.26% in the two months (Refer xls in accessory C and E). distributively month the portfolio will give 500 per month from the cash deposited in the bank.Risk attached to the portfolioThe risk percentage is 0.98% for the entire portfolio (Refer xls in Appendix C). Thus at no point of time investment portfolio will fall below the acceptable value over a two-month period.Total risk of 0.98% indicates how much risk your portfolio will bear over the two month period. This risk is primarily due to high level of expected variance in the share prices of British airways shares and also shares of Morrison Supermarkets. The debt securities and fu nds have an almost negligible variance and standard deviation. Therefore, this evens out the excessive risk in equity securities.Since, debt securities do not have much risk, the man-to-man equity securities need to be closely monitored for risk. The easiest way is to monitor their beta levels. A beta measures a stocks volatility relative to the market. Stocks with betas of 1 move up or down more or less in along with the market. Stocks with betas of less than 1 tend to be less volatile than the market as a whole. Volatile stocks have betas higher than 1. However, betas alike should be examined with care as if the market itself is volatile, then a stock with a beta of 1 or less still could be very risky.In conclusion, you should take the above portfolio as a recommendation. The market may change very fast and therefore needs to be closely monitored.APPENDICESAppendix A Assumptions for the ReportMr. Riemann does not have any industry preferencesIt should be 10 asset portfolioThe c ustomer would be sorrowful if the investment portfolio were to fall more than 10% in value over a two-month period.The customer would expect a monthly return of close to 1%.The customer expects at least 50,000 of the total 1,000,000 to be hold as cashThe economic conditions are defined as bonanza 0.6 chemical formula 0.3 and recession 0.1For equity securities only use FTSE 100 and 250 and for debt use popular markets. UK Bonds have been preferred.Appendix B Movement of Equity Securities(Source rube finance)Appendix CAppendix D Other Documentary conclusionBritish AirwaysLand SecuritiesBarclays(Source yokel finance)Morrison Supermarkets(Source Yahoo finance)Sage Group(Source Yahoo finance)Std Lf UK Gilt Rtl IncSWIP Defensive Gilt A IncHSBC Gilt Fixed Int Inc(Source Yahoo finance)New Star UK Property A Acc(Source Yahoo finance)Appendix E Calculation of the matter under Boom, Normal Conditions and Recession occur on equity securitiesReturn under normal conditions has been calc ulated. This is based on the movement of the stock prices. The return on the equity stock will build up from sale of shares at a higher price over the attached future. On the basis of the past data the share prices under normal conditions have been estimated two months from November 2007. The % increase in the share prices is taken as the return during normal times. Variance in share prices are thereafter taken into account and the boom and recession values are calculated.Return on debt securities and fundsThis is based on the three year total return percentage. Two months percentage is worked out and then adjustments are made for variance.Return on 9% Treasury Loan Bond 2008The bond pays a 9% coupon (divided into two semi-annual payments) and matures in July 2008. The bond has been bought at par. The income 9% per annum on the investment will be there until maturity.Return for 2 months = (9% / 12)*2 =1.5%If an amount less than par were paid for the return would be=Par/purchase pr ice * coupon = running income tax returnReferencesThe financial Times, Markets Equities, accessed from http//www.ft.com/markets/equitiesYahoo Finance, FTSE 100 Companies, accessed from http//uk.finance.yahoo.com/q/bc?s=%5eftset=c=Barclays Financial Planning, Investment Planning, accessed from http//www.barclays.co.uk/financialplanning/investment-planning.htmlInvestment Planning, accessed from http//www.bestinvest.co.uk/planning/portplan/index.htm