Advanced Portfolio Management L7 Assessment Answer

Answer A: Existing portfolio Analysis

It is essential to understand an investor's risk capacity, risk tolerance, and ability to handle market changes in order to implement a proper portfolio strategy. Therefore, a good risk-return profile can be used to inform the establishment of portfolio objectives. Having a set of standards against which the portfolio's performance may be evaluated simplifies course corrections down the road (Cooper & Sommer, 2020).

A person with spending intentions can create an asset allocation strategy by considering the relative risks and potential rewards of various investment options. By picking from different asset types and investment options, investors can spread out their assets in a way that gets the best diversification and tries to get the returns they expect. The investor also has the power to.

Lloyds Bank- The P/E ratio of the bank is higher, which can be considered as a positive investment

Hsbc- The profit margin is higher and so is the P/E ratio, therefore, it is a positive investment.

Barclay- The net profit of the firm is stable, therefore, this asset can be considered as a positive investment.

Imperial Tobacco- The P/E ratio of 5.49 and the yield is also higher.

Wal-Mart-This company has ample opportunity to grow as the payout is lower.

 It is crucial to assign weights to different types of assets, such as stocks, bonds, flexible assets, and non-traditional investments, based on the risk level of the portfolio as a whole. Asset allocation is a strategy based on reviewing the investor's current situation and goals. This strategy is often changed in response to life events. As Mr. Sharp's story shows, investors tend to change their allocation strategy as they get closer to their retirement goal date and are less willing to deal with volatility and risk.

Investment Trust

Diversification means having assets and asset groups that don't have a lot in common with each other. Mr. Sharp is involved in more than one business. The person in question works as a lawyer in the City of London and gets paid £190,000 per year. Also, they have a large amount of money set aside in four different individual banking institutions in case something unexpected happens.

The funds mentioned above are meant to be kept as cash reserves, and the person in question does not need any income from their stocks right now because of how their taxes are set up. If one asset class goes down, the other asset classes won't be harmed. This acts as a buffer between the investment portfolio and Mr. Sharp's choice. Also, the area of financial mathematics shows that diversification can increase the expected return of a portfolio while lowering its risk (Daud et al. 2019).

The process of rebalancing is required in order to meet the client's goals. It means bringing a portfolio back to its original goal allocation on a regular basis, usually once a year. The goal of this move is to get the assets back to where they were before market changes threw them off from where they were supposed to be. For example, a portfolio that starts out with 70% stocks and 30% bonds may change to 80% stocks and 20% bonds after a long market rise. The investor got a good return on his investment, but the portfolio is now at a level of risk that is higher than what the investor is willing to take.

Bonds

Most of the time, adjusting means selling high-priced securities and putting the money into low-priced, generally out-of-favor securities. By rebalancing their portfolios every year, investors can make money and increase their chances of growth in high-potential sectors while keeping their portfolios in line with their original risk and return profile (Wu et al. 2021).

Standard deviation may seem hard to figure out, just like other scientific measures. But because standard deviations are so useful for experienced users, there are many free mutual fund screening services that give them out. The standard deviation shows how volatile a fund is and how likely its results are to change a lot in a short amount of time. A security that is volatile is seen as having a higher risk because its performance could change quickly and unexpectedly either way at any time. The standard deviation of a fund is a way to measure how risky it is because it shows how much its returns vary from its average return (Cooper & Sommer, 2020).

Security Performance

The overall portfolio is as follows:-

Answer B: Changes

If Mr. Sharp's goals have changed in the future, he may need a steady source of income to add to his salary when he retires. In this case, he should change his asset allocation plan to include income-producing assets like bonds, stocks that pay dividends, and real estate investment trusts or REITs. These groups of assets have usually given investors a steady stream of income.

Figure 1: Graph of the portfolio

But since Mr. Sharp's investment plan is still ten to fifteen years away, he needs to focus on long-term capital growth above the FTSE All-Share index. So, the number of assets that produce income needs to be matched with many assets that focus on growth, like stocks.

Assuming that inflation and the economy stay stable over the long run, the following asset allocation plan for Mr. Sharp's investment portfolio may be good. 60% of the allocation needs to be made up of equities, and Mr. Sharp's main investment goal is to make long-term capital gains above the FTSE All-Share index. In terms of long-term returns, stocks have usually done better than other asset types, even though they are more volatile and their values change more often. Spreading a large amount of money across different countries, businesses, and market capitalizations is one way to lower the risk of a big loss. Diversification can reduce the volatility of returns and give buyers access to other areas and sectors of the global economy that have growth potential. To establish an ideal portfolio, one must adhere to the tenets of Modern Portfolio Theory, which states that this must be accomplished through the strategic allocation, diversification, and ongoing realignment of assets. The process of allocating the total value of an investment portfolio over a number of distinct asset categories is referred to as asset allocation. One of the steps in the process is called diversification. The acquisition of various instruments with a low correlation level is the strategy that yields the best results when used for diversification. Using the earlier comparison as a jumping-off point, it is believed that applying this strategy with Mr. Sharps will result in positive outcomes (Daud et al. 2019).

Action Proposed

The security and action proposed is as follows:-

Table: Action Plan

Justification

It is important to hold the shares that have performed well or expected to perform well in the near future. However, it is also true that the shares are required to be sold when they are on extreme high or their price is about to come down in the near future. Due to this reason, the shares of JP Morgan and Barclays are required to be sold as it is expected that the price is expected to come down. The rest shares are required to be hold as it is expected that the price will increase in the near future.

Analysis

It is absolutely necessary for policymakers to make certain that regulations provide incentives for the prudent management of pension fund assets in order to accomplish the goals of the plan regarding retirement income. The fundamental idea that the primary purpose of a pension fund is to provide income during retirement is the first proposition that is made in the Guidelines. This idea ought to be taken into consideration during the process of rulemaking. The prudential precepts of security, profitability, and liquidity, which determine the optimal distribution and utilization of assets, can be included in regulations in the form of quantitative limits. This is given, however, that the regulations continue to conform to these tenets. The concepts in question would not be compatible with the required amounts of minimum investment for various assets (Cooper & Sommer, 2020).

Mr. Sharp wants to invest in real estate after he leaves, so this allocation tries to give him exposure to this asset class. Most of the time, long-term gains from real estate have been more stable and less unpredictable than gains from stocks. Diversifying the real estate between different types of homes is important to avoid putting too much money in one place or one type of property (Redfern, 2023).

10% of the portfolio should be made up of cash and cash equivalents. This gives you money in case of unplanned costs or a drop in the market. A small amount of money can keep the stock stable and give you a chance to make money when market opportunities come up. Bonds get 20%, and their goal is to produce a steady stream of income that can be used to supplement Mr. Sharp's pension income in his later years. Since Mr. Sharp still has 10–15 years to spend, it makes sense to put some of his money in bonds, which usually give more stable returns than stocks. Diversifying the bonds across different issuers, maturity dates, and credit scores is important to lower the risk of default (Daud et al., 2019).

It is important to keep in mind that the economy and inflation can have a big effect on how different asset groups do. It is a good idea to look at and rebalance Mr. Sharp's asset distribution plan every so often to make sure it stays in line with his investment goals and level of risk tolerance. Also, the asset allocation plan needs to be looked at and changed every so often because Mr. Sharp's financial situation and goals may change over time.

Therefore, the overall alternative portfolio is as follows:-

(5..75% * 12500) + (6.25% * 14500) + (1.75% * 20000) =1975 E250000 cash in a current account with immediate access plus the total investment equals 251975.

Answer C

The allocation of one's assets is an essential component of any sound strategy for retirement. The technique of allocating an investor's capital among a variety of asset classes—including cash, equities, and bonds, among others is known as diversification. The goal of asset allocation is to reduce risk, increase returns, and satisfy the unique needs and requirements of each individual investor (Arsanjani & Ershadi, 2022).

Portfolio Suggestions to Mr Sharp

The alternate security investmnent plan is as follows:-

As Mr. Sharp approaches his retirement age, he needs to give some thought to how the composition of his assets should shift. People who are getting close to retirement age should, as a general rule, keep investments that are safer and offer some degree of security and stability. As a consequence of this, Mr. Sharp may consider increasing the amount of money he invests in bonds and cash while decreasing the amount of money he invests in equities. Bonds, in comparison to stock investments, often have a lower level of risk and can provide a more consistent flow of income. The buying of bonds is another potential means of hedging against losses sustained in the stock market. Another low-risk investment choice that may provide liquidity and a modest return is cash, which can also be invested in money market funds. Mr. Sharp should give some thought to diversifying the kinds of goods that he possesses as well. This entails investing one's capital in a diverse range of assets, each of which presents a unique opportunity for profit and loss. He might, for instance, choose to invest his money in a variety of bonds, such as those issued by corporations, the Treasury, or local governments (Wu et al. 2021).

Additionally, he had the ability to buy stocks in a wide variety of industries, including those relating to consumer goods, healthcare, and technology, among others. Investors who are fearful of taking risks, want some degree of active management of their portfolio, and place high importance on the safety of establishing a minimum guaranteed level above which the portfolio's value cannot drop may find the approach of assured asset allocation to be a suitable option. A person like Mr. Sharp, who wants to build a baseline standard of living for their retirement, may find that an insured asset allocation approach is well-suited to their management objectives. Mr. Sharp's goals include establishing a baseline quality of living. It is in everyone's best interest to seek the advice of the individual who is concerned regarding the reallocation of assets, and one should take into consideration a comprehensive revision of the investment strategy. Although it is important to note that volatility is a key metric for assessing the risk associated with security, relying solely on a fund's stable past performance does not necessarily ensure that it will continue to be stable in the future. This is an important point to keep in mind. The presence of market elements that are difficult to foresee can have an effect on the fund's level of volatility. As a consequence of this, a fund that displays a standard deviation in a certain year that is close to or exactly equal to zero may display behavior that is significantly different in the year that follows that year. Comparing a fund to another fund that has a similar investment strategy and yield is one method that may be utilized in the process of determining how effective a fund is in optimizing the return it generates in relation to the volatility it experiences. Choosing a fund that has a standard deviation that is smaller is the ideal choice since it increases the amount of return achieved in relation to the amount of risk that is taken on (Redfern, 2023).

Target-date funds are investment vehicles that are designed to automatically modify and diversify holdings over a set period of time in order to meet the investor's desired age at retirement. When one is getting ready for retirement, one of the most important things they can do is make sure their assets are safe. Because increasing age is accompanied by a rise in the costs of healthcare, it is necessary to understand the complex structure of Medicare in order to prepare for the rising costs (Daud et al. 2019).

Many people have the misconception that the coverage that is provided by the traditional Medicare program is insufficient, which is why they look into purchasing a Medicare Advantage or Medigap policy to supplement their original Medicare coverage. Additionally, it is essential to give some consideration to the potential advantages that could be gained by purchasing both life insurance and long-term care insurance (Arsanjani & Ershadi,2022).

Timeline

Figure 1: Time line

It is essential to keep an eye on the big picture when it comes to putting money down for retirement. Therefore, Mr. Sharp needs to direct his attention toward making purchases that will assist him in expanding his company and increasing the amount of money he makes over the course of time. Investing in high-quality stocks and bonds that have the potential to increase in value over the course of their tenure is one illustration of this strategy. The transfer of ownership of assets is a common practice that takes place rather frequently. Mr. Sharp needs to maintain a careful check on his investments and be prepared to make adjustments as necessary as he comes closer to the age at which he can retire. Because of this, he will never purchase anything that does not correspond with the objectives and strategies he has set for himself (Redfern, 2023).

References

Arsanjani, M. A., & Ershadi, M. (2022). Avenues to improving the effectiveness of project portfolio management in the construction industry. International Journal of Management Science and Engineering Management, 17(4), 259-268.

Cooper, R. G., & Sommer, A. F. (2020). New-product portfolio management with agile: challenges and solutions for manufacturers using agile development methods. Research-Technology Management, 63(1), 29-38.

Daud, A., Suharyanto, A., Diawati, P., Nguyen, P. T., & Shankarn, K. (2019). A Quantitative Analysis of Portfolio Governance Management for Product Innovation in Organization Management Systems. Religación. Revista De Ciencias Sociales Y Humanidades, 4(19), 262-267.

Lekwauwa, N., & Bans-Akutey, A. (2022). Commercial banks’ profitability and portfolio management in Ghana. Annals of Management and Organization Research, 3(4), 245-257.

Redfern, J. (2023). Organizational strategy and portfolio management. In Strategic Portfolio Management (pp. 38-66). Routledge.

Riesener, M., Doelle, C., Schuh, G., Zhang, W., & Jank, M. H. (2019, August). Implementing Neural Networks within Portfolio Management to Support Decision-Making Processes. In 2019 Portland International Conference on Management of Engineering and Technology (PICMET) (pp. 1-7). IEEE.

Wu, M. E., Syu, J. H., Lin, J. C. W., & Ho, J. M. (2021). Portfolio management system in equity market neutral using reinforcement learning. Applied Intelligence, 1-13. 

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