Investment Portfolio Statement
Investment Policy Statement:
Executive Summary:
Tax ID: A1258122
Current assets: $10,000,000
Return: 7 %
1-yr Loss Limit: (Worst case scenario): - 10 %
Purpose of investment policy statement:
The main purpose of this investment policy statement is to provide the client with a clear investment plan that ensures maximum returns. It therefore:
Provides an excellent overview of all investment options available to the client
Ensures that all investment options are in line with the client’s needs, wants, and objectives
It provides the required means of communication between the client and all other parties involved in the investment plan
It meets all the laid out international, state, and federal laws with regard to investments
Meets all the fiduciary and due diligence ethical directives of a highly experienced investment advisor
Objectives:
The objective of this portfolio is to ensure the short-term and long-term maturation of the investment portfolio developed for the client.
Time horizon:
The investment portfolio will include both short term and long-term investments. The short-term investments will mature in an estimated period of three months while the long-term investments will have a maturation period of ten years.
Risk Tolerance:
Based on information availed to the client, it is clear that there is an amount of risk associated with the investment portfolio. Therefore, it is important to note that during the period of the investment, the market value of the portfolio is expected to fluctuate with time. Acceptable risk tolerance levels have been agreed upon. This is critical in ensuring that both the short-term and long-term objectives of the investment portfolio are achieved.
Performance expectations:
A 7% return on investment is expected for the long-term investments taken up the client. This figure is based upon the historical figures examined. This figure may vary based on the asset class of the investment since as mentioned earlier fluctuations are expected. The main reason for these fluctuations is changes in the economy, government policies, and international events just to mention a few.
Asset allocation strategy:
For this investment portfolio, the investment advisor considered three main asset classes. These are cash, fixed income, and equity. The main reason for this selection was to diversify the client’s portfolio. This ensures that the client has both long-term and short-term investments. Furthermore, it helps reduce the risk associated with each type of asset class. The asset allocation strategy adopted is in line with the client’s profile. Numerous factors such as age, savings per year, income required, tax rate, risk tolerance, and economic outlook were taken into consideration while allocating assets. Below is the client profile used.
Age: 50
Current assets: $250,000
Savings per year: $5,000
Income required: 0%
Marginal tax rate: 28%
Risk tolerance: Balanced (5 scale of 0 to 10)
Economic outlook: Moderate (5 scale of 0 to 10)
Characteristics of each asset class:
Fixed income assets:
The fixed income asset class provides a return on investment after a fixed schedule. This implies that the client will receive periodic payments over time. At the end of the maturity period of the fixed income asset, the principal is returned. The two examples considered for this asset portfolio are treasury bonds and treasury bills. The main advantage of this asset class is that it provides both short-term and long-term investments. The level of fluctuation in the value of the asset is also very low reducing the overall risks. Lastly, the client will be provided with a regular income over the period of investment. The main disadvantage is that this asset class has a low return.
Equity assets:
Equity assets in this case mainly refer to common stocks. For this asset portfolio, different types of stocks are under consideration. This helps improve the diversity of the client’s investment. The main advantage of this asset class is the high rate of return. However, it is important to note that such assets are highly susceptible to fluctuations. This is evidenced by the high fluctuations in the rate of return.
Cash assets:
The money markets fund is the last asset class considered for this investment portfolio. The main characteristic of this asset is that it is low risk, and highly liquid. On the other hand, they offer investors low returns.
Calculation:
Source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Arithmetic average:
Variance and covariance:
Optimal Portfolio:
The optimal portfolio for the client is as shown below. For the portfolio 60% of the funds, available ($150,000) will be invested in equity. This will be further divided into 10% large cap growth ($25,000), 20% large cap value ($50,000), 10% Small/Mid Cap ($25,000), and 20% International stock ($50,000). 30% of the investment will be made into fixed income. This will be divided into 20% Long-term treasury bonds ($ 50,000) and 10% short-term treasury bills ($ 25,000). Lastly, 10% of the portfolio will be cash investments. This is as summarized in the table below.
Comparison and contrast of the portfolio’s performance to S&P performance:
As mentioned earlier, the portfolio is expected to give a minimum return of 7%. This is lower as compared to the 5-year average performance of the S&P 500, which is at 13.31%. However, it is important to note that the portfolio has lower risk of fluctuation as compared to the S&P 500. As mentioned earlier, for this investment portfolio, the investment advisor considered three main asset classes. These are cash, fixed income, and equity. The main reason for this selection was to diversify the client’s portfolio. This ensures that the client has both long-term and short-term investments. Furthermore, it helps reduce the risk associated with each type of asset class.
Table 5: 5-year performance of the S&P 500
