Report on Investments and Portfolio Management

Running head: INVESTMENT & PORTFOLIO MANAGEMENT 1
Investments and portfolio management
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Institution Affiliation:

INVESTMENT & PORTFOLIO MANAGEMENT 2
Question 1
a) A stock index is the requirement of the valuation on the section of the stock market. It
usually is estimated from the prices for the chosen equities (Brooks, 2015). It is more of
the tool that is used by the investors as well as the financial manager to describe on the
market, through comparison of the return to the various investments.
In Australia the stock used is S&P/ASX franking credit adjusted indices. This kind of the indices
provide the measure of the Australian equities after tax performance (Bodie, Kane & Marcus,
2011). This usually help in the gauging of the tax-effectiveness of the tax-exempt as well as the
superannuation portfolios.
In the USA the benchmark index which is used is the Dow Jones Commercial Average. This
really is a weighted average of 30 significant stock which is exchanged on the New York Stock
Exchange as well as NASDAQ.
In Hong Cong the index which is used is the Hang Seng. This index usually record on the daily
changes particularly to the largest organization off the Hong Kong stock market. This normally
represent about 67% of the capitalization for the Hong Kong Stock exchanges (Willcocks, 2013).
In Japan the Index used is Nikkei index or even the Nikkei stock exchange. This is the stock
market index which is used for the Tokyo Stock Exchange (Bodie, Kane & Marcus, 2011). It is
generally the price-weighted index and these components are usually reviewed once every year.
In England the index used is FTSE 100, which is the market capitalization weighted index for the
one hundred England organization which are traded on the London Stock Exchange (Willcocks,
2013).

INVESTMENT & PORTFOLIO MANAGEMENT 3
In China the index which is used is the SSE composite which is the index which is for all the
listed stock at the Shanghai stock exchange (Brooks, 2015).
b) Major asset classes that are likely to feature in each of the types of managed funds.
a. Stable fund
The major asset class which this will likely feature is the defensive assets (fixed interest bonds)
(Willcocks, 2013). This assets is appealing alternative to the lower yielding vehicle such as the
money market funds for the portion of a given portfolio which is used to counter the volatility in
the market (Brooks, 2015). In most of the case this asset class contains the investment option
which are available mainly to the qualified retirement plans (Bodie, Kane & Marcus, 2011). It is
usually managed by the portfolio of the high rated corporation or even the government, the short
term as well as the intermediate terms bonds with the principal protection aligned to it by the life
insurance organization.
b. Balanced fund
The asset class for this fund is the equities. The balanced is the option for the intermediate-term
investor, they own both the stocks and the bonds. When it comes to this asset class the investor is
looking for a combination of the stock component, a bond component and sometime they could
look for the cash market element in the individual portfolio (Jordan, 2014). Furthermore, these
types of hybrid funds usually stick to the relatively fixed mixture of the stocks together with the
bonds which reflects either the moderate, or even the higher equity. The investors seeks out this
mixture of the safety, revenue and the modest capital appreciation. The quantity of this kind of
the mutual fund invests into both of the asset class need to stay within the list of the minimum as
well as the maximum (Jordan, 2014). Moreover, it is very important keep in mind that the asset
allocations family, the balanced funds’ portfolios would not change materially on their mix of

INVESTMENT & PORTFOLIO MANAGEMENT 4
the asset (Bodie, Kane & Marcus, 2011). This is unlike the life-cycle, the target date as well as
the positively managed asset utilization funds which make the modifications in the result of the
risk appetite as well as the age or even the overall market condition for the investment (Jordan,
2014).
c. Growth fund.
This falls under the asset class of real estate and commodities. This include the direct investment
to the residential, industrial as well as the industrial property additionally they could include the
indirect investment in the listed investment with regards to the listed property vehicles such as
the REITS ( Jordan, 2014 ). Within this asset class they possess a greater risk than the fixed
interest however they are much less risk as compared to the equities (Brooks, 2015). Moreover,
they are less liquid than the other asset classes which could result to a higher recommended
minimum time frame. Additionally, it is important to note that the entry as well as the exit
usually cost significantly higher and the minimum time frame is usually seven years.
Question 2: How is duration related to interest elasticity of a fixed income security? What
is the relationship between duration and the price of a fixed income security?
When one takes the initial derivative of the bond or perhaps other fixed income security price (p)
which is in respect to the yield of the maturity denoted as (R). It is provided as follows:
The economic understanding of the denotation D is generally the measure of the percentage
change in relation to the value of a certain bond for the assigned percent change when it comes to

INVESTMENT & PORTFOLIO MANAGEMENT 5
the yield of the maturity- the interest elasticity (Brooks, 2015). This equation may rewritten as
provided in a more practical application:
When the duration has been clearly known, therefore, the alteration in the price of a given bond
as a result of small change in the rate of interest, R, could be estimated through use of the above
formula.
Question 3:
a) What is the modified duration of the bond? What is the dollar duration of the bond?
The modification duration formula is stipulated as follows = D/ (1+R/2) = 11(1+0.10/2) =11.55
years
Dollar duration= MD*P= 11.55*1000= 11550
b) What will be the estimated price change to the bond interest rates increase 0.10
percent (10 basis points)? If rates decrease 0.20 percent (20 basis points)?
When the rate of interest increase to 0.10 percent:
The change of the estimated price=- dollar duration which is multiplied by the change of the
rate= -11550*0.001=-11.55 dollars
The new price will be 1000-11.55=988.45 dollars
When there is a decrease of the interest by; 0.20 %:
The estimated change in the price will be as follows = -11550*-0.002 = 23.1 dollars

INVESTMENT & PORTFOLIO MANAGEMENT 6
The new price will 1000+23.1=1023.1 dollars
c) Actual price of the bond be under each interest rate in the part (b)
Traditional method which can be used for calculating the present price of the bond.
Yield to maturity = (Annual interest + ((Par Value - Market Value) / number of years to
maturity)/2) / (Par Value + Market value) /2 (Bodie, Kane & Marcus, 2011).
0.1 + (1000-0)/ 11)/2/ (1000)/2= 988.426 dollars
Change in rate Estimated price Actual price Error
+0.001 988.45 988.426 0.024 dollars
+0.002 1023.1 1023.329 -0.229 dollars
There is a difference in the error because of the estimations or rounding of the value. Moreover,
the traditional methods tends not be accurate since it is based on the estimation of the figures
(Bodie, Kane & Marcus, 2011).
Question 4:
On the last dividend, the initial D0, was at 20 cent per share. The dividend is anticipated to grow
considerably continuously at 8%. The requited rate is sixteen percent. Consequently, dependent
on the dividend growth model, the present price value could be calculated as follows;
P0= D 1 /(Rg) D0(1 g)/(Rg)
Therefore, this is calculated as follows = 0.20 *(1+0.08)/ 0.16-0.08)
= 0.20* 1.08/(0.16-0.08)

INVESTMENT & PORTFOLIO MANAGEMENT 7
= 0.20*(1.08/0.08)
= 0.20*13.5 =2.7 dollars
One can possibly estimate the price in the 5 years via determining the dividend in the 5 years by
using the growth model once again. Conversely, it is possible to identify on the stock price which
can increase at 8% each year and calculate the long term price instantly. The following is the
computation of the dividend in the five years;
D5 = Do * (1+g)5
Therefore, 0.20*(1+0.08)5
0.20* (1.08)5
0.20*`1.4693=0.29387 dollars
The price in the five years may be as follows;
P5= D5 * (1+g)/ (R-g)
0.29387* 1.08/0.08
0.31738/0.08
3.967 dollars.
Once one grasps on the model of the dividend, it becomes easier to notice the following;
P5 = Po* (1+ g)5
2.7*(1.08)5
2.7*1.4693
=3.967 dollars
These two approaches based on the computation provided they yield the same price value in the
five years.
ii) Part 2 of the question is solved as follows;

INVESTMENT & PORTFOLIO MANAGEMENT 8
In this scenario, there is a supernormal growth which is expected in the next 3 years. Therefore,
calculation needs to be made on the dividends particularly in the rapid growth period as well as
stock price in the 3 years. The dividends are calculated as follows;
D1 = 0.20 * 1.20 = 0.24 dollars
D2= 0.24* 1.20 =0.288 dollars
D3= 0.288* 1.20=0.3456 dollars
After the period of the 3 years, the growth rate would fall to 8% indefinitely. Therefore, the price
at that particular time would be as follows;
P3 = D3 * (1+g)/(R-g)
=0.3456* 1.08/ (0.16-0.08)
=0.3456* 1.08/0.08
=0.37325/0.08
= 4.6656 dollars
To therefore, calculate on the stock present value, there is need to compute the present value of 3
dividends as well as future price;
Po=
0.24/1.16 +0.288/ (1.16)2 + 0.3456/ (1.16)3 +4.6656/ (1.16)3
=0.207 +0.214 + 0.221 +2.989
=3.631 dollars

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References
Brooks, R. (2015). Financial management: core concepts. Pearson.
Bodie, Z., Kane, A., & Marcus, A. J. (2011). Investment and portfolio management. McGraw-
Hill Irwin.
Jordan, B. (2014). Fundamentals of investments. McGraw-Hill Higher Education.
Willcocks, L. (2013). Information management: the evaluation of information systems
investments. Springer.