Estimate the risk & return of investment in different asset classes for an investment portfolio

 

 
Learning Outcomes and pass attainment level:
 

1.    Estimate the risk & return of investment in different asset classes for an investment portfolio.
 
2.    Construct investment portfolios applying different investment concepts and theories to achieve set investment goals.
 
3.    Assess portfolio performance by measuring investment performance and attribution analysis.

 
 

 
General guidance
This is an individual assessment whilst there is no objection to you discussing the content of this assignment with your peers, your final submission must be completely your own work. Plagiarism and copying will not be tolerated and may lead to subsequent penalties being imposed. This is an individual assignment and all calculation, analysis and narrative submitted must be your own work.
The assignment will require a considerable personal investment of time and effort.
Structure of the assignment
There are three separate questions included within the assignment and you should attempt all three questions. The assignment requires you to respond to three different requirements in a report format. When determining the of effort and words for each of the section of the assignment. The total ward count (excluding numerical calculations and analysis to be provided in appendix) is 2000 words +10%). When determining the amount of effort and words (though suggested) for each section of the assignment, it will be advisable to examine the weighting of the marks allocated to requirements. The recommended font Size is 12 (Arial or Times New Roman) and round numbers to two decimal points. Make sure you cover all the requirements in adequate detail.
Submission of the assignment

  • All three requirements must be attempted and submitted in one document. You are advised to prepare your assignment in Word format and copy and paste contents from Excel in an appendix Where spreadsheets have been used to support your work.
  • The coursework must be completed in Word and submitted through Moodle.
  • Turnitin plagiarism software will automatically be applied, it is advised that the coursework is put through draft Turnitin prior to final submission.
  • The word count needs to be included at the end of the document.
  • All pages must be numbered.
  • The assignment requires a report format, which implies the use of formal, business English.
  • For a level 6 finance and investment submission, it is expected that students refer to a range of academic texts. These must be referenced using the Harvard Referencing System.
  • Your student ID number should be shown on each page of your assignment.
  • Your assignment should be submitted electronically via Moodle and you are advised to do this well in advance of the submission deadline to avoid any systems related issues. Feedback on your assignment will also be provided via Moodle once the marking has been completed.

 
 
Indicative marking guide

   0-39%Fail 40 – 49%  Third 50 – 59% 2:2 60 – 69% 2:1 70 – 79% First 80 – 100% First
Criterion1  Mark   Estimate the risk & return of investment in different asset classes for an investment portfolio.
Unclear about various asset classes for an Investment portfolio. Lack of understanding of risk & return for an Investment. Some ability shown of accurately comparing different asset classes for an investment. Partial understanding of risk & return for an Investment. An ability to shown of accurately comparing different asset classes for an investment. Understanding of risk & return for an Investment.
Explanations would benefit from more detail and justification.
A good ability to shown of accurately comparing different asset classes for an investment. Understanding of risk & return for an Investment.
Explanations are well reasoned, and some justification provided.
A very good ability to shown of accurately comparing different asset classes for an investment. Understanding of risk & return for an Investment.
Explanations are justified and applied to the given context.
Excellent ability shown of accurately comparing different asset classes for an investment. Understanding of risk & return for an Investment.
Explanations are fully justified and applied to the relevant context.
Criterion2  Mark   Construct investment portfolios applying different investment concepts and theories to achieve set investment goals.
Little evidence of constructing the investment portfolios applying different investment concepts and theories to achieve set investment goals. Coursework provides partial evidence of constructing the investment portfolios applying different investment concepts and theories to achieve set investment goals. Insufficient and/or inaccurate description and evaluation of different investment concepts and theories to achieve set investment goals. Coursework provides adequate evidence of constructing the investment portfolios applying different investment concepts and theories to achieve set investment goals. A fair description and evaluation of different investment concepts and theories to achieve set investment goals. Coursework provides good evidence of constructing the investment portfolios applying different investment concepts and theories to achieve set investment goals. A good description and evaluation of different investment concepts and theories to achieve set investment goals. Coursework provides very good evidence of constructing the investment portfolios applying different investment concepts and theories to achieve set investment goals. Very good description and evaluation of different investment concepts and theories to achieve set investment goals. A high degree of critical awareness and skills are demonstrated in constructing the investment portfolios applying different investment concepts and theories to achieve set investment goals. Excellent description and evaluation of different investment concepts and theories to achieve set investment goals.
  Assess portfolio performance by measuring investment performance and attribution analysis.
Criterion3  Mark Lack of ability to
assess portfolio performance by measuring investment performance and attribution analysis
Unsatisfactory  work showing little ability to assess portfolio performance by measuring investment performance and attribution analysis. Satisfactory  work showing some ability to assess portfolio performance by measuring investment performance and attribution analysis. Good ability to assess portfolio performance by measuring investment performance and attribution analysis. An excellent work that fully meets the requirements with clear signs of appropriate application assessing portfolio performance by measuring investment performance and attribution analysis. The submission indicates an ability to assess portfolio performance by measuring investment performance and attribution analysis. There is some evidence of additional reading around the topic.

 
Questions 1:
 
Ernie Marks, 62, is the owner of a regional construction company. Marks started the company when he was 20 years old, after receiving his grandfather’s old pickup truck as a birthday gift. Through conservative management and judicious use of bank debt, Marks was able to build the company to over 150 employees. The company is debt-free and generates all required operating funds from internal operations.
 
Marks’ wife, Ellie, does not work and they have two children. Their daughter Allison, 28, suffers from a debilitating illness and requires constant attention. Their son Ernie Jr., 26, is in good health and graduated in the top 5% of his class at a prestigious New England liberal arts university. Marks wants to retire at 65 and wants Ernie Jr. to succeed him in running the company, but all efforts to train his son for succession have failed.
 
Marks has just sold the company to a national construction concern for cash. The after-tax proceeds from the sale plus the Marks’ current investment portfolio total $5 million. The only requirement of the sale agreement is that Marks remain at the firm until he reaches 65, at which time he will retire and have no further obligations to the company.
 
Marks is seeking financial advice from Christopher Weber, CFA. In their first meeting, Marks makes the following statements:
 
“Ellie and I owe nothing on the home in which we have lived for the past 30 years and we do not plan to move. The new owners of the company will pay me $ 150,000 next year, and that amount will grow at the general rate of inflation until I retire. They will provide medical benefits for Ellie and me for life, but I will not participate in their retirement plan.”
 
“I would prefer that the portfolio not lose more than 2% of its value in any one year. Since my bank account is earning only 1.5%, however, I realize that my portfolio may require some risk exposure.”
 
“Ellie and I estimate our personal living expenses will be $100,000 in the coming year, and I
agree with you that they will probably grow at the general rate of inflation of 2% per year
thereafter. My accountant indicates I will have a 33% average tax rate.”
 
“We have decided that Ellie can no longer care for Allison as in the past. Had Ellie not helped care for Allison over the past year, we estimate the total cost would have been $100,000, and there would have been no associated tax breaks. Given that a large portion of this cost was medical, I would expect the cost of her care to increase at a rate of proximately 5% annually. It is our intention to provide for Allison’s care as long as she lives.”
“Ernie Jr.’s ‘free spirit’ has essentially made him unemployable, so I want to provide him with a stipend of $50,000 per year with the first $50,000 paid in the coming year. I would also like the stipend to increase annually at the general rate of inflation. When Ellie and I have both passed away, the stipend will stop, and Ernie Jr. is to receive a lump-sum payment equal to 50% of our estate. The remainder of the estate will go to charities that I will designate later.”
 
Required:
 

  1. Formulate the Marks’ risk objective. Calculate the after-tax nominal rate of return that is required to meet all expenses for the coming year. Show your calculations.                                                 (16 marks)

 

  1. Construct the constraints portion of the investment policy statement for the Marks. Justify each response with one reason.               (16 marks)

 
Question : 2
 
Sara, CFA, is convinced that reporting portfolio performance according to the Global Investment Performance Standards (GIPS@) will provide her firm a competitive edge in the marketplace. After reading the latest information on the Standards, Sara formulates the following statements as a guide for how she will approach implementation of GIPS at her firm.

  • “All Composites will have the same beginning and ending annual dates. We will apply accrual accounting to all interest generated by the bonds in our portfolios. Starting 2010 we will calculate time-weighted portfolio returns on the date of all large external cash flows. All discretionary, fee-paying portfolios will be included in at least one composite and composites will be defined according to investment strategy, mandate, and/or objectives.”

 

  • “My firm is approximately seven years old. Since GIPS only requires five years of annual investment performance, I can easily meet that requirement. Since my reporting systems are So effective, I also will have no problem maintaining the 5-year reporting requirement into the future.”

 

  • “My effective electronic systems will have no trouble capturing and maintaining cost and market values for portfolio valuations. My system automatically generates return information every quarter and, for my international composites, uses the same exchange rate sources for the portfolios and the benchmark.”

 

  • “All of my fee-paying portfolios will be included in at least one When clients decide they no longer need my services, my system automatically recalculates previous portfolio performance to reflect the removal of the portfolios from relevant historical performance presentations.”

 
 
Required:

  1. Indicate whether each of Sara’s statements is an accurate representation of

GIPS. If you find these statements to be inaccurate, explain the reason(s) for the inaccuracies.                                                                                         (24 marks)                         
 
Question : 3
Required:
Explain the motivation for algorithmic trading and the classification of algorithmic trading strategies, including the objectives of simple logical participation and shortfall implementation strategies.                  (24 marks)
 
The End
 

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