Investment Strategies and Risk Management

This assignment delves into the realm of investment strategies and risk management. It examines various investment approaches, including tactical asset allocation and the application of real options in industries like telecommunications. The analysis incorporates factors such as interest rate risk, sovereign risk, and equity volatility, highlighting their influence on bond duration and financial institutions. The document also explores sustainable development's role in corporate performance and investigates the use of valuation methods for woodland and forest resources.

FINANCIAL MANAGEMENT AND INVESTMENT ANALYSIS 1
INVESTMENT AND PORTFOLIO MANAGEMENT
Student’s Name
Institutional Affiliation
Question 1;
(a)
Index benchmark sets point of reference for portfolio evaluation on stocks.1nvestors are
mostly provided with information on stocks that they use to contrast the performance of their
individual investment portfolio with the mean overall market performance in the same sector.
Different states use specific benchmark index for track performance as illustrated below;
In Australia, the fixed income index series is what is used as the benchmark for measuring the
performance of the bond while the money market is always benchmarked by Australian Bank
Bill Index Jones(2008.Pg 200). Dow Jones U.S. Financials Index is that index benchmark
applicable to the United States region for measurability performance of stocks and market at
large however it is divided into Dow Jones US Select Investment Index form and that of Dow
Jones U.S López(2007.Pg 298). Select Insurance Index depending on the market field. Hong
Kong stock market, especially on funds, is seen to be benchmarked by an index known as Hang
Seng Index (HIS), this index measures performance is used to track economic performance of
stocks in Hong Kong Liu(2009.Pg 60).

FINANCIAL MANAGEMENT AND INVESTMENT ANALYSIS 2
Vanguard FTSE Japan Index ETF is the point of reference of equities in Japan and it is
used to evaluate market performance of large and medium-size stocks in Japan Stock Market.
United Kingdom is likewise seen to have its stock benchmarked by an index known as FTSE
All-Share Index that serves the measurability performance of among the largest companies in
London Stock Exchange. Finally in China MSCI EM Index is what sets the point of reference of
stocks in China it is seen to control and measure stock performance in China.
(b)
Stable fund assets are referred to as defensive assets since they procure stable and less
risk income basically on interest payments made. Stable fund assets are featured to be less
tolerance for risk and high market volatility Faff(2005.Pg 260). This asset basically suits short-
term investors and they include cash and fixed interest based investments that are mostly seen to
generate less return.
A balanced fund, on the other hand, involves combination mixture of stocks components
with the aim of mixture safety stand on investors. The asset class in balanced funds includes
bonds especially the treasury bonds that are deemed less volatile. Equities used as investment
objective likewise forms part of balanced fund asset class Bauer(2005.Pg 1760).
Growth fund is featured to suit development and growth of investment, although they have the
aggregate potential of earning high returns they likewise have subsequent high levels of risks
over projects being taken for a long time. Securities shares representing ownership in company’s
forms part of growth asset class Ferreira (2013.Pg 500). Likewise, the class includes
infrastructures, listed and unlisted properties the likes of trusts, real estates and private equities
investments that are deemed exist able for growth purpose Haiss(2008.Pg 420)
Question 2;

FINANCIAL MANAGEMENT AND INVESTMENT ANALYSIS 3
Ideally, duration of a security is deemed to be the average maturity life of the security, it
is further prudent to note that the interest rate is flexible upon duration such that the sooner the
redemption or payment maturity of a security the lower the interest and vice versa. Duration is
hence termed as the direct measure of the interest rate elasticity because proportion adjustment of
duration numerically the more likely the price rate of the security changes more the same to the
interest rate Brewer(2007.Pg 410).
Detailed understanding can be approved upon the arithmetic use of formulae as illustrated; DP=-
D {dR/1+R) P, where R=Interest Rate, D=Price percentage change, P=Price of a security. From
the formulae, we can comfortably state that a known security duration leads to price changes as a
result of change in interest rates Breeden(2009.Pg 40)
Conclusively it is prudent to state that investors should understand that security duration
is measured and determined with the analysis that if interest rates increases, of course, the
duration of maturity decreases and hence the yields are lowered as the prices get lower and vice
versa. Likewise, there is the need to realize that decline in interest rates goes hand in hand with
higher duration’s securities thus causing the decline in yields as a result of the change in prices
upwards. It is therefore transparent that there is huge gain or benefit on investing in the higher
duration securities than those of lower maturity duration Van (2005.Pg 121)
Question 3;
(a)
=0.1/2=0.05, =0.05*1000=$50
+1+0.05=1.05
=$1000+$50=$1050 it is to be mature at year 11*2=22
=To get the cash flow you multiply by present interest factor at

FINANCIAL MANAGEMENT AND INVESTMENT ANALYSIS 4
=Yr. =year multiply by bond yield multiply by present interest factor at that year
=Yr. 14 =14*50*0.505=353.55 = Yr. 15 =15*50*0.481=360.77
=Yr. 16=16*50*0.458=366.49 =Yr. 17 =17*50*0.436=370.86
= Yr. 18 =18*50*0.416=373.97 =Yr. 19=19*50*0.396=375.94
=Yr. 20=20*50*0.377=376.89 =Yr. 21=21*50*0.359=376.89
=Yr. 22=22*1050*0.342=7896.74
=353.55+360.77+366.49+370.86+373.97+375.94+376.89+376.89+7896.74=13821.15
Duration= (13821.15/ 1000/2) = 6.91
While Modified duration = D/ (1 + R/2)
Hence=6.91/ (1+0.05) =6.581
MD=6.581 Years
For Dollar Duration= MD x P, where MD=Modified Duration and P=the principal amount of the
bond
=6.581*$1000=$6581
(b) In case the coupon rate increases by 0.10% the price change of the bond is likewise expected
to decrease as being illustrated here below,
Price Change Estimation= the negative dollar duration multiply by the change of the interest rate.
Negative dollar duration=-$6581
Change in interest rate=0.1/100=0.001
= -$6581*0.001= -$6.581
Therefore the new price of the bond is expected to be=$1000-$6.581=$993.42
If the interest rate is reduced by 0.20% Lee(2011.Pg 450) there will be increase in price of the
bond as calculated below;

FINANCIAL MANAGEMENT AND INVESTMENT ANALYSIS 5
Negative dollar duration=-$6581
Change in interest rate=0./100=-0.002
It is negative since its decreasing
= -$6581*-0.002=+13.162,
Thus the new price should be=$1000+$13.162=$1013.16
(c)The actual prices of the bond at 0.10% increase and 0.20%
Interest Rate Change Price Estimated Actual Price Error
0.10% increase $993.42 $ 993.35 0.07
0.20% decrease $1013.16 $1013.36 -0.2
The errors mostly result from the non-consideration of convexity at the time of measuring
and determining duration elasticity Harmantzis(2007.Pg 120).
Question 4;
Paid Dividend =20cents per share, the par value=20cent
Rate=0.16, therefore we can formulate
Share Price=Dividend Paid dividend by the difference between the rate and the growth thus;
Price=20*(1+0.08) ^1(16%-8%)
=21.6/0.08=270cents in year 1
Therefore the par value of the share at year one is 270cents
The growth of dividend will be8%
Value of Share 5yrs=270 cents (1+0.08) raised to power 6 divide by the change of rate from 16%
to 8%

FINANCIAL MANAGEMENT AND INVESTMENT ANALYSIS 6
Value in Five years=20*(1.08) ^6=31.74cents
=31.74cents/ (16%-8%) =/8%
=396.72cents
By assuming that the dividend is expected to grow at 20%
At par the dividend was 20cents now it is to grow by 20%, therefore, the dividend will rise to
this should be done yearly
= yr. 1=20cents (1+0.2) ^1/ (1+0.16) ^1=20.689,
=yr. 2=20cents (1+0.2) ^2/ (1+0.16) ^2=21.4,
=yr. 3=20cents (1+0.2) ^3/ (1+0.16) ^3=22.1,
=20.689+21.4+22.1=64.17
We further need to add the present value of the dividend=467/1.16^3=299.35 to the sum of the
3year dividend change value;
=299.35+64.17=363.5 cents. Therefore the selling price or issue price today of the share stands
at 363.5cents.
We can therefore generally conclude by stating that equity stocks are always subjected to the
time value of money for purpose s of measurability Zhang (2009.Pg 5100).
Portfolio analysis generally majors on diversifying risks through setting up investments
strategies after conducting performance evaluation on the existing market portfolio. It involves
mitigation of risks under the umbrella of maximizing returns. Most investments are prone to
risks and hence greater strategies and plan has to be built on strong portfolio management
evaluation so as to curb risks and its volatility. It is therefore important to ensure that before
proceeding to partake any investment the need to analyze return, duration, risks and entire field
of performance.

FINANCIAL MANAGEMENT AND INVESTMENT ANALYSIS 7

FINANCIAL MANAGEMENT AND INVESTMENT ANALYSIS 8
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FINANCIAL MANAGEMENT AND INVESTMENT ANALYSIS 9
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