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The Investment Process and its Application Essay

   

Added on  2020-07-22

12 Pages3113 Words67 Views
THE INVESTMENT PROCESS AND ITSAPPLICATION TO YOUNG FAMILIES ANDTO RETIREES

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1.....................................................................................................................................................1Investment process...........................................................................................................................1Different investment avenues and risk as well as return profile......................................................2Analysis...........................................................................................................................................3Portfolio for 35 year old client.....................................................................................................3Portfolio for 65 year old retire person.........................................................................................6Conclusion and recommendation..................................................................................................10REFERENCES..............................................................................................................................11Table 1Investment proportion for client that is 35 year old............................................................3Table 2Input data of firms...............................................................................................................4Table 3Weight and expected return table........................................................................................4Table 4Total capital gain in equity..................................................................................................4Table 5Mutual fund performance....................................................................................................5Table 6Fixed deposit performance..................................................................................................5Table 7Overall capital gain..............................................................................................................5Table 8Calculation of expected return by using CAPM Model......................................................5Table 9Investment amount..............................................................................................................7Table 10Information related to firms included in portfolio.............................................................7Table 11Expected return and weight of stock.................................................................................7Table 12Total capital gain on stocks...............................................................................................7Table 13Calculation of required rate of return by using CAPM model..........................................8Table 14Mutual fund portfolio........................................................................................................8Table 15Fixed interest.....................................................................................................................9

INTRODUCTIONInvestment is one of task or activity that is done by every individual. Major challenge inmaking investment is to make it in safe way and ensuring achievment of objectives. In presentresearch study for two clients that are in age of 35 and 65 portoflios are prepared and accordingto their objective asset allocation is done. Relevant comparison of return of securities is done inthe report. At end, conclusion section is prepared in the research study. Investment processDetermination of investment policy: It is the statement that is used by the investors todetermine that what sort of actions they will take in the specific situation. Invesment policymay be aggressive or passive in nature. There is difference between both investment policy.Under aggressive investment strategy one frequently make changes in its portfolio. Whereas, inpassive investment strategy one make investment for a specific duration and does not alter it.Thus, there is difference between both investment strategy. There are benefits and limitationsof both investment policies (Chopra and Ziemba, 2011). This is because in case of aggressiveinvestment strategy one frequently make changes in its portfolio and many times it happenedthat due to alteration in portfolio number of times investor miss profit making opportunity orfailed to earn sufficient amount of profit on invested amount. Opposite to this, there is anotherinvestment policy which is passive under which major benefit is that if market is in positivedirection then in that case due to small jerks one does not make change in its portfolio andobtain good return. Drawback of this policy is that if market is not performing well then in thatsituation if this invesment policy is followed then huge amount of loss can be beared by theinvestor because according to situation no adjustments were made in the portfolio (What AreEquity Funds Useful For In an Investment Portfolio?, 2017). Thus, it can be said that there areboth positive and negative sides of the both investment policies and it depend on investors thatwhich one they select for their business.Investment analysis: In second step investor do analysis of securities on which it want to makeinvestment for specific time period. Investment analysis can be done in many ways like makingcomparison of returns of security over specific time period (Schindler and et.al., 2010). Onesecurity return can also be compared with other security in order to identify profitable one.Apart from this, industry comparison can be also be done in order to select specific stock in theportfolio. It can be said that it is the one of the most important technique of stock analysis. 1 | P a g e

Valuation of security: Valuation is another important stage of investment and under this oneidentify value of stock. There are number of methods that can be used to evaluate investmentsecurity like shares. Discounted cash flow model is commonly used to do investment analysisand by using this model fair value of equity is identified. Apart from discounted cash flowmodel price earning ratio and other multiples are also one of the best approaches that can beused to compuate fair value of equity (Seldin, Miller and Seldin, 2010). Usually, it is observedthat finance experts make use of duscounted cash flow model to make their decisions. This isbecause in it cash flows are already taken in to account and along with this capital structure isalso considered to compute fair value of equity. It can be said that it is the important stage ofthe investment process. Portfolio construction: In this final stage portfolio is constructed and in this regard variedparameters are taken in to account like risk associated with security which is measured bycomputing beta value and return profile of investment security. In portfolio constructionmultiple sort of assets can be taken in to account equity, bond and mutual fund etc. It dependon investor that what sort of mix it have in its portfolio. Usually, investment policy which maybe aggressive or passive and investment objective are taken in to account to construct portfolio.Different investment avenues and risk as well as return profileEquity: Equity is one of the risky and high profitable asset and due to this reasoninvestors often prefer to make investment in it. There are number of factors that haveimpact on equity like economic condition of the nation, global economic fluctuation andnews or press release etc. With advent of any news changes comes in stock market andsome times due to positive news stocks perform well and sometimes due to bad news interms of decline in value of economic indicators or any other thing stocks tumbeled byhigh percentage (Harvey and et.al., 2010). Due to this reason risk and return profile ishigh in equity. Debt: It is another investment avenue where by large amount investment is made. In debtcategory varied sort of security comes like debentures, debt oriented mutual funds andbonds etc. On all these securities there is less amount of percentage return that is obtainedby investor. However, risk is also very low in case of debentures and other debtinstruments because in these securities there is guarantee that fixed return will beobtained and principle amount will remain safe. 2 | P a g e

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