Modern Portfolio Management: Factors Affecting Risk, Portfolio Allocation, Return Calculation, Industry Analysis of Apple

Modern Portfolio
Management

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................3
a. Identifying two factors which affect Maggie ability to take risk............................................3
b. Explaining two problem relating to existing allocation of her portfolio.................................3
c. Calculating the return requirement of the Maggie’s investment portfolio..............................4
d. Identifying liquidity requirement, time horizon and unique circumstances...........................4
e. Hugo case relating to contribution plan..................................................................................5
QUESTION 2...................................................................................................................................5
a. Calculation relating to 1 year and 2 years forward rate..........................................................5
B..................................................................................................................................................6
QUESTION 3...................................................................................................................................7
a. Conducting industry analysis..................................................................................................7
b. Computing intrinsic value of company by using Dividend discount model and two ratios
under relating valuation technique along with assumption.........................................................9
c. Selecting one ratio calculated and explaining the weakness of relative valuation technique
...................................................................................................................................................10
REFERENCES..............................................................................................................................11

QUESTION 1
a. Identifying two factors which affect Maggie ability to take risk
There are many different types of factors which affects the risk taking capability of the
investor. This is pertaining to the fact that the investment and its return depends on the market
changes and these are not in hand of people (Hoffmann, Ahlemann and Reining, 2020). Hence,
for this it is essential for them to analyse these factors and ensure that it does not make a negative
impact over the risk taking capacity of the investor. The two factors that affect the Maggie’s
ability to take risk is as follows-
 The first factor that affect the risk taking capacity is the age and time to retire. This will
be affecting the risk taking capacity as currently she is 50 years of age and is retiring after
10 years. So it might be possible that the risk taking capacity of Maggie reduces and she
might not take more risk by investing in riskier investment options.
 Along with this, another factor affecting the risk tolerance capacity of Maggie is the
investment time frame. This is necessary for the reason that Maggie is having limited
time in retirement and within that she has to attain the target of arranging US$10 million
for all the three children so that she can give it to their children when she dies.
b. Explaining two problem relating to existing allocation of her portfolio
For getting better return and being successful it is very important for the investor that
they allocate the portfolio in better and effective manner. This is because when the distribution of
the asset will be rationally correct then this will be providing better returns. Thus, the problem
associated with the portfolio allocation of Maggie are as follow-
 The major problem associated with the allocation is the time horizon because of the
reason that this allocation cannot be stable for the whole duration of investment (Bansal,
Gutierrez and Nagarajan, 2021). This is necessary because it is not possible that all the
time the selected ratio will be same for every time.
 Another problem associated with the allocation of the portfolio was the risk tolerance
capacity. This is particularly because of the reason that Maggie is having moderate level
of market volatility and this implies that risk taking capacity is moderate and in case it
would be higher than more return can be generated.

c. Calculating the return requirement of the Maggie’s investment portfolio
Asset classes Weight Return Weight*return
Cash 30% 10.80% 0.0324
Large- cap stock 30% 10.80% 0.0324
Small- cap stock 20% 10.80% 0.0216
Tesla (TSLA.US) 20% 10.80% 0.0216
Total portfolio return 0.108
10.8 %
Hence, the total return which the overall portfolio will be providing to Maggie is 10.8 %
and this is good. This is pertaining to the fact that when the return will be provided by the whole
portfolio then this will be beneficial for the investor and is profitable.
d. Identifying liquidity requirement, time horizon and unique circumstances
The portfolio is the one which includes the different investment option for the person to
have good return in future. This is very important for the reason that in case the return of the
portfolio will not be good then this will be affecting the future of the person. There are many
different constraints which affect the portfolio and its return to a great extent. With the success of
the portfolio there are many different types of constraints to be considered which are as follows-
Liquidity requirement
The liquidity is being defined as the capability of the asset to be converted into cash
easily and quickly. This is very important for the reason that in case the assets will not be
converted into cash then the portfolio will not be beneficial. This is necessary for the reason that
in case cash availability is not there then some asset from the portfolio can be sell. Hence, for
assessing the liquidity, it is necessary for Maggie that she separate all the living expenses and
planned outlays and assess the ease and cost and certainty through which the asset can be
changed into cash (Butler, 2022). The liquidity requirement is less as Maggie is in condition to
meet the expenses within the salary only. Hence, in the present case the liquidity risk is very low
and this is good as more return can be gained from portfolio.
Time horizon
The time horizon is being referred to as the remaining time for which the person will live.
This is very important for the reason that in case time horizon will not be decided then the return
cannot be calculated. Hence, in the present case the time horizon is approximately 80 years of