Investment portfolio for a fictional client

Investment portfolio for a fictional client.

Portfolio individual project (20% of grade)

For this project, students will prepare a recommended investment portfolio for a fictional client.  By the end of Week 2, students will be provided with a specific investment objective for their client.  Student will also be provided a list of asset classes with their expected 5-year expected returns and their expected standard deviations.

The investment portfolio will span a 5-year timeline, with parameters and requirements specified for each year (see below).  The portfolio will be in a cash (non-retirement) account.

Your selected portfolio must include the following sub-categories of investments:

1. Equities (large cap, medium cap, small cap, value, and growth)

2. Debt securities (range of taxable and not-taxable bonds)

3. International equity and debt

4. Emerging market exposure

1. Year 0:

1. Based upon your specific investment objective, build a diversified portfolio containing all the provided asset classes. Within each asset class, you will include a specific security, (stock, bond, etc), an ETF and a mutual fund.  You will start with a $1,000,000 in cash and this cash is to be fully allocated among the asset classes while keeping in mind your risk tolerances and return expectations.

 

You will define the portfolio asset allocation (strategic asset allocation (SAA)) by percentage across the investment categories.  International (non-US) investment exposure must be included as an investment category.

1. Explain in narrative form to the investor why you added the specific investment securities that you selected. For example, why did you choose a high dividend stock, or a value mutual fund, or a stock with a high P/E.

· Calculate the weighted Expected Return of your new portfolio based on the percentage asset allocation. Based on historical trend, is it enough to accomplish your objective?

1. Calculate the expected annual income. Does this meet your objective?

2. Calculate the weighted Standard Deviation of your portfolio. Is this an appropriate level of risk for your client and their objective, and if not, do you need to decrease or increase this risk?

3. Report if your first attempt has the potential to meet your objectives in terms of income, growth of principal and risk. If not, what changes need to be made?

· Bonds were included in the portfolio with the intention of potential reducing the overall risk of the portfolio. Let’s prove this “risk reduction” by reviewing the correlation of equity returns to fixed income returns.  Thus, calculate the 5-year correlation of your of your stocks to the return of the 10 year Treasury Note.  Does your correlation provide risk reduction?

1. Year 1:

1. Assume after the first year, your portfolio values have changed based on changes in the market.

1. All domestic stocks/mutual funds have increased by 10%

2. International stocks/funds increased by 20%

3. Emerging markets increased 23%;

4. Bonds have declined by 5%.

2. Calculate the new value of your portfolio incorporating these market changes and update these values in an Excel spreadsheet.

· Then rebalance your portfolio back to the original asset allocation weights set with your SAA. Note any capital gains are subject to a 15% capital gains tax.

1. Year 2:

1. Your client has requested a $200,000 disbursement from the portfolio. Illustrate the impact on this distribution on the overall portfolio

1. From which accounts are you distributing, and why?

2. Present the portfolio as of end of year 2, after the distribution.

2. Year 3:

1. The market has experienced a large correction as large cap stocks have decreased by 25%, small cap stocks have decreased by 35%, international stocks have declined by 40% and emerging markets have decreased by 55%; however bonds have increased by 30%.

2. Rebalance your portfolio back to the original SAA using your original weightings.

3. Year 4:

1. The markets have now stabilized but you are fearful of another decline in equities and you want to reduce the overall risk of the portfolio. Thus,

2. Illustrate the use of options on your stocks to reduce risk. Also,

· Illustrate how you can use the futures markets to decrease the risk of the portfolio.

1. Format

1. All investment portfolio presentations and calculations are to be prepared using Excel.

2. All narrative is to 12 pt Times New Roman

· Cover page

1. Appendices to include, but not limited to:

1. Supporting financial and ratio analysis

2. Spreadsheet analysis

2. Reference page (APA format)

1. References to include background information on the investments selected

Investment portfolio for a fictional client