Scenario Description
Obviously, investment decisions are the most important decisions taken by an organization or an individual in different span of time (Elton et al, p.56). An effective investment decision can be extremely essential for the sake of an individual, but proper analysis deem necessary to accomplish this action. Most of the investors recommended to use a portfolio for the investment, as it is the best method from which an individual can enhance their yield or return and mitigating the risk accordingly. In this analysis, it is requested to make an investment memorandum by using three different steps. It is required to put on the money in three different investment vehicles and classes that are stocks, bonds and cash. The total invested amount is $ 100,000.
Investment Memorandum
In this part of the investment memorandum, there are three major steps that needed to be covered accordingly
Step-1: Asset Allocation
Discussing Macroeconomic Factors: It is requested to select the stocks from the net of Standard & Poor (S&P-500) Index. It is an important index found in the economy of the United States (US). The economy of the US is the largest economy of the world that has the highest amount Gross Domestic Product (GDP), and high amount of Foreign Direct Investment (FDI). After a serious economic crisis of 2008-2009, the economy has now shown its resiliency again to stand up on their feet. Therefore, it can be said that the economic consequences pertaining to the company are strong and effective, and the investor has no problem and issues related to the same.
Justification of Portfolio: Portfolio always makes to mitigate the level of risk from the investment, and consequently increases the financial belongings (Kolbe and Greer, p.45). Every investor in the world likes to have a thorough knowledge regarding the risk and return trade-off, and for the same purpose making the portfolio is an important strategy. There are three different investment vehicles which have been found in this analysis which are stocks, bonds and cash. It is requested to allocate accordingly, and the sectors must be different in each of the scenarios. Apart from the equities, bonds and cash are some other important investment vehicles which have been taken into consideration for the analysis purpose. The allocation has been placed in the below mentioned manner
- Stocks = 60%
- Bonds = 25%
- Cash = 15%
The justification in such allocation is clear which is that stocks move apparently very fast, and there are certain chances to gain high amount of return with mitigating the risk accordingly. On the other hand, investment in Bonds are somewhat safe while in cash securities these are bit tricky and volatile, hence lowest amount of proportion has been allocated to this particular investment vehicle. The dollar amount of the allocation would be like this
- Stocks = $ 60,000 (60%)
- Bonds = $ 25,000 (25%)
- Cash Securities = $ 15,000 (15%)
Step-2: Sector Allocation
This particular section related with the Equities only. It is required to select different sectors to invest the money in it. According to the scenario, the minimum amount of sector selection is three, while the highest amount of sector is six (Kolbe and Greer, p.59). There are three different sectors have been selected for the same analysis. The names of the sectors are Energy, Material and Technology. The justification of the allocation in these sectors are clear as these are those industries that performed extremely well during the current economic crisis as well, and they have the tendency to deliver their best in the current scenario as well. The fluctuation in these sectors are high, and they are now emerged as basic necessities of the individuals as well as the companies, hence the probability of getting high return through parking the investment in these sectors would be on a higher scale. Investors in all over the world are now focusing on these sectors to park their money for the high yield purpose, and the deliverables from these sectors for their investors are also in the positive term and node, which is a positive sign for the future of the investment.
The allocation in terms of percentages in these three sectors with their Tickers is as follows
- Energy (XLE) = 35%
- Materials (XLB) = 18%
- Technology (XLK) = 6%
The dollar amount that allocated in this particular example is mentioned below. Total stock proportion is $ 60,000
- Energy = $ 21,000 (35%)
- Materials = $ 10,800 (18%)
- Technology = $ 3,600 (6%)
Step-3: Equity Selection
There are three different sectors have been taken into account for the analysis, therefore, each of the sector should cover with an equity in particular. The selected companies are
IBM (Technology) (IBM)
Headwater Incorporated (Materials) (HW)
EnerNOC (Energy) (ENOC)
The amount of shares that can be purchased from the allocated amount is like this
The share prices of the companies are
IBM = $ 162.55
HW = $ 11.75
EnerNOC = $ 14.50
Highest number of shares can be found in the EnerNOC, and Headwater has 919 shares. The mean return in the three investment classes on the hypothetical basis are as follows
Stocks = 2.5%
Bonds = 1.8%
Cash = 1.6%
The mean standard deviations are as follows
Stocks = 10.9%
Bonds = 6.5%
Cash = 9.95%
If the portfolio would have been made, then the portfolio return would be like this
The mean return would become 2.19% from the making of the portfolio, which is higher than the return in individual security; hence the idea of making portfolio is powerful. The mean Standard Deviation is as follows
The riskiness has also decreased considerably with the making of portfolio, as found from the above mentioned analysis.
Conclusion
The entire investment memorandum depends upon three different steps that made the investment accordingly. There are three different investment classes which have been taken into account for the analysis purpose which are stocks, bonds and cash. Specific amount of money has been invested in the portfolio, and found that the making of the portfolio not only increases the amount of return, but it also decreases the amount of riskiness from the investment. Therefore, the main mantra of making portfolio is achieved through this analysis, and it is an important aspect for an investor from different aspects in particular.
Work Cited
Elton, Edwin J et al. Modern Portfolio Theory And Investment Analysis. Print.
Kolbe, Phillip T, and Gaylon E Greer. Investment Analysis For Real Estate Decisions. Chicago, IL: Dearborn Real Estate Education, 2006. Print.
