Sample on Capital Markets and Investment

Portfolio Assets

Selection of Assets in the Portfolio and Rationale Behind Choice Bond

Bond is the one of the main asset on which investors at large scale makes an investment. There are number of reasons due to which investment is made in the bond. One of the main feature of bond is that in same invested amount remain protected and its value cannot be depreciated. On investment low rate of return can be earned. It can be said that investment is safe and on same return is earned (Glode, 2011). However, return is low but investment is safe. Investor is risk averse in nature and due to this reason it is very important to make moderate portion of investment safe.

Due to this reason it is decided that 30% investment will be made bond. In recent time period it is observed that more and more mutual fund houses and investors are making investment in bond because equity market is unstable and turmoil in same reduce investor confidence on the stock market in terms of returns. In past few months in global and domestic market investors lose money because there is a pessimistic environment in the both markets and due to this reason large investors that track market very closely become panicand sold equity in bulk which lead to decline in the shares and index value. Thus, it is very important to protect some amount of money from devaluation. Hence, investment is made in the bond for capital appreciation and safety of same.

Equity : Equity is another investment avenue where investment can be made. It must be noted that very low rate of return is generated by the debt schemes and bonds. By making entire investment in the equity one cannot earn sufficient amount of return on the invested amount (Kosowski, 2011). Thus, it is necessary to take some degree of risk so that desired return can be generated by the portfolio. It can be said that there is huge importance of equity for the investors. Research results reflects that in past year return of 11% is generated by the FTSE index and stocks also give sufficient return to the investors.owever, beta value of the stocks is very high in range of 0.70 to 1.15 (Financial times, 2017). Thus, there is a very high risk on the investment amount and at same time there is a high income earning opportunity in the equity. Investor is risk averse in nature and it is very important to earn sufficient amount of return on the invested amount. Thus, proportion of 20% is given to the equity in the portfolio. It can be said that by considering profile of the investor and market condition as well as return that can be generated by the portfolio 20% allocation to equity is appropriate. Reasons for selection of firms is given below.

1. 3i group plc : 3i group plc is one of that largest company that is working in finance industry. There are multiple reasons du to which mentioned firm is taken in to account. It must be noted that UK economy is coming on track gradually and due ti this reason demand for finance will increase. Thus, it is expected that in the upcoming time period revenue of the mentioned firm will increase. Return of 60.20% is generated by the mentioned company share. Thus, in the upcoming time period better return can be generated by the mentioned firm shares.

2. Ashtead group: Ashtead group is operating a rental business and is one of well-known firm. Return of 91.65% is generated by the mentioned firm in the past year and its beta value is 0.89 which reflects that if FTSE will increase then stock can generate good amount of return.

3. Baraatt development: Barratt development is operating in the home construction business. With elevation in economic growth of the UK demand for homes will increase in the upcoming time period. Hence, it is expected that firm will earn good amount of return in the upcoming time period. Hence, mentioned firm is included in the portfolio.

Suggested: Child Development Education | Along With Proper Knowledge

4. Intercontinental hotels: Intercontinental hotel is taken in the portfolio as it is working in the tourism industry. Tourism industry is one of the industry in the UK that is growing at fast rate. Return of 33.85% was generated by the mentioned firm in the past year and its beta value is 0.95. Thus, by considering past performance of stock, anticipated high growth of industry and high beta value it is expected that good amount of return can be generated by the mentioned firm. Due to this reason mentioned firm is included in the portfolio.

5. Sage group: Sage group is working in the software and computer science. Beta value is 1.12 and return percentage is 2.67%. Mentioned firm is operating in the technology sector and same is growing at rapid pace. Thus, it is expected that mentioned firm may grow at rapid pace in the business. Hence, Sage group is included in the portfolio.

Mutual fund: Mutual fund is the one of the main investment avenue on which in current time period most of investors and institutional investors are taking interest. This is because investment in the mutual fund scheme to some extent ensure that invested money will be safe and moderate amount of return will be earned on same. There are varied sort of mutual fund schemes like balanced, growth and debt. All these things are different from each other. Balanced mutual scheme is one under which in balanced manner investment is made in the debt and equity. On other hand, there is a growth scheme under which entire investment is made in the equity that comes in the blue chip category or highly profitable firms. Debt schemes are one under which investment is made in the debt instruments about 80% of the investment amount. In the current portfolio 30% allocation is made to the mutual fund scheme and by doing so it is ensured that moderate return will be earned on the investment and capital will remain safe. Under mutual fund scheme investment will be made on the AAP balanced fund under which in balanced manner investment is made in the debt and equity. 60% investment is made in equity and 40% investment ismade on debt in the mutual fund scheme. It can be said that 30% investment is made in the mutual fund scheme and by using same portfolio risk is controlled.

Fixed interest: After making entire investment in different securities the remaining amount will be invested in the bank deposits. It is necessary to make investment in the bank deposits because investment in same is secured at specific interest rate. It is very important to earn interest at different rates on varied securities because by doing so it is ensured that in some securities huge amount of return will be earned. It can be said that there is huge importance of the fixed interest investment in the portfolio (Hoepner, Rammal and Rezec, 2011). In the current report, 10% allocation is made to the fixed interest bank deposit.

Commodity: Under category of commodity investment will be made in the bullion and under this specific number of lots will be purchased. There are some specific reasons due to which investment is made in the gold. It must be noted that in there is inverse relationship between equity and gold. This means that when share price declined demand of gold increased in the market. Gold is considered as safe heaven and when there is turmoil in the stock market investors usually makes an investment in gold in order to earn sufficient return on the portfolio.

Investment Theories

Efficient Market Hypothesis Theory

Efficient market hypothesis theory is one of the most important theory that state that it is impossible to beat the market in terms of performance. Means that specific stock or firms shares cannot give return more than same is generated by the index. This means that even any news comes in the market due to same any stock cannot outperform market. It is assumed in the theory market is efficient and when any news comes in the market its effect is incorporated in all firms shares automatically. This means that all firms shares traded at fair value in the market and according to news relevant effect comes in the shares price. This theory believed that any company share never remain undervalued or overvalued in the market.

This theory can be used in the portfolio construction and by following same one without using discounted cash flow and other equity valuation model can take inclusion decisions in respect to thefinancial instrument in the portfolio. Simply one have to identify the risk and return profile that is associated with the product and must accordingly make decision in respect to including any specific security in the portfolio. By using this theory one can also estimate maximum likely return that can be earned on the portfolio. Means that as per this theory stocks cannot beat the market return. Thus, if for the last three month FTSE grow by 6% then it can be assumed that stocks or portfolio of same will generated return of less than 6% which may be 4% to 5% (Agapova, 2011). Thus, by using this theory one can estimate likely return that can be generated by the portfolio. It can be said that by using mentioned theory standard return that need to be earned can be determined.

Capital Asset Pricing Model :Capital asset pricing model is the one of the most important theory that can be used by the individuals to make decisions in respect to investment. This model help one in calculating the required rate of return on the investment amount. In this regard some variables are taken in to account namely beta, risk free rate of return and market return. In order to compute required rate of return first of all value of risk free rate of return is taken in to account. Thereafter, from the market return risk free rate of return is deducted and same is multiplied by beta. Then computed value is added to the risk free rate of return to compute required rate of return in the portfolio. Risk free rate of return is subtracted from the market return because same react the risk premium. The excess return that is earned on the specific security is multiplied by beta because it reflect the rate of variation that may come in the return of any stock with small change in the index value. By doing so it is identified that with change in index what value may be of risk premium then risk free rate of return is added to same in order to calculate real return that can be earned on the investment amount. By using this model one can identify the return that one needs to earn for the risk that is taken on investment (Chen, Ferson and Peters, 2010). If required rate of return is high and market is expected to be unstable in the upcoming time period then in that case one can abstain from making investment in specific company share whose CAPM value is high. Thus, capital asset pricing model can be used in the portfolio construction

Modern Portfolio Theory : Modern portfolio theory is the one of the most important theory that is used to construct the portfolio. This theory was prepared by the Harry Markowitz. This theory state that investor that is risk averse in nature can maximize the return at a given level of risk. It is the one of the main theory that is used in the current time period to construct portfolio. There are number of advanced tools and methods that are used to create optimum portfolio. By using efficient frontier method different portfolio are created at different level of risk with maximum return. It can be said that modern portfolio theory is the one of the important theory that is used to construct the portfolio. This theory state that portfolio must be diversified in nature and under this multiple security must be included in the portfolio. Inclusion of more security lead to reduction in risk of portfolio (Bogle, 2015). This theory is used in the current time period and under this portfolio managers while constructing portfolio include number of securities like equity, bond and mutual fund etc. There are number of calculations that are done by the portfolio managers to construct the portfolio and under this excel is usually used to develop efficient frontier chart. By viewing a chart one easily identify the portfolio and proportion that different stocks and securities must have on the portfolio.

Investment Styles : Investment style refers to the investment strategy like active and passive strategy. Active strategy refers to the strategy under which elements of the portfolio are changed frequently. On other hand, passive strategy is the one under which investment is kept in the specific security for the long time period. There is a huge difference between both strategy in terms of usage and change in the portfolio. Under active strategy it is assumed that market is highly volatile in nature and due to this reason it is necessary to change the portfolio. Thus, active strategy is followed and under this portfolio is changed frequently by the managers. On other hand, in case of the passive strategy it is assumed that market will not change frequently and it will reach to certain level after different fluctuations. Hence, under passive strategy investment is made in the portfolio for long time period (Gil-Bazo, Ruiz-Verdú. and Santos, 2010). This investment theory is used at large scale by the portfolio managers because by doing so return on same is maximized. In the current time period most of portfolio managers are using active strategy because market is highly volatile in nature and by using mentioned strategy higher return can be earned on the invested amount.

Portfolio Evaluation

Bond: Benchmark refers to the standard against which performance of the bond is compared. It must be noted that in case of bonds government bond is used as standard. In the present case investment is proposed to be made in the bond which is reflated to the government. Hence, it is difficult to determine the standard for bond in the current portfolio. In case one make an investment in any bond that is related to the private company government bond can used as standard. It can be said that there is huge importance of the benchmarks because by using same performance of the specific security is measured. It is very important to track down the performance of the portfolio because by doing so it can be decided by an individual whether investment can be carried out on specific security or not (Nohel, Wang and Zheng, 2010). One on time can decide to exit from the investment and can make same on the most profitable avenue. It can be said that there is a significant importance of the bechmarking for equity investors. One must take due care while selecting anything as bechmark for the portfolio because by comparing performance of same with the bechmark accurate performance of the portfolio is measured.

Equity: In case of equity bechmark will be FTSE 100. This is because all investment in the equity is made in the firms that comes in the category of equity and is component of the FTSE 100 index. In order to measure performance of the equity portoflio percentage change of same will be compared with the index and by doing so it will be identified whether portfolio perform well or worst. It can be observed that investment of 30027 is made in the equity and after investment its value is 43714 which means that return of 43% is earned on the invested amount. On other hand, FTSE yearly return is 15% which reflets that portfolio outperofrm the index and give sufficient amount of reutrn to the investor. It can be observed that higher return is obtaind on the 3i group plc of 102.23% followed by Asthead group 81.86%, Baratt development 8.71%, Intercontinental hotels 32.21% and Sage group 2.87%.

Mutual fund: In case of mutual fund scheme Mixed Investment 20-60% Shares will be considered as benchmark. Sector refers to the any standard that is used as parameter to compare the performance of fund with the standard. Mixed Investment 20-60% Shares refers to the 60% equity and 40% debt which show the balance between equity and debt in the market. It must be noted that mutual fund scheme that is included in the portfolio is also balanced fund. Mixed Investment 20-60% Shares also indicatebalance between debt and equity (Financial times, 2017). It can be said that appropriate benchmark is set for the mutual fund scheme. Point to be noted is that there is very low return on the mutual fund scheme which is 0.07% which is lower than the standard. In the upcoming time period value of mutual fund can increase at rapid pace. This is because in the balanced fund majority of portion is covered by equity. If in case market will be in uptrend return on portfolio can be increased.

Fixed interest: Rate of intertest that is given on average basis by the commercial banks in the UK for fixed interest deposits can be considered as standard for the interest that is received on the deposits that are with the commercial bank in the portfolio. On comparison of the return that is obtained on fixed deposit with the standard value it can be identified that similar returns are geenrated. Hence, it can be said that suffieient amount of retunr is geenrated by the portfolio.

Commodity: In case of gold price that is given by the LBMA which is also known as London Bullion market association will be taken as standard and by considering same performance of the portfolio can be measured (7IM AAP Balanced class C inc, 2017). On compariosn of gold price with the standard it can be said that good amount of return is earned on the invested amount.

Sources of information : There are multiple sources from which information in respect to financial securities is obtained and idea for development of portfolio is obtained. Entire market related data is taken from financial time’s website. Apart from this, information about mutual fund scheme is taken prudential website. Fact sheet of the mutual fund scheme is downloaded and from same relevant information is obtained. Apart from this, different sites are visited on internet to gather relevant data.

References

• Glode, V., 2011. Why mutual funds “underperform”.Journal of Financial Economics.99(3). pp.546-559.
• Kosowski, R., 2011. Do mutual funds perform when it matters most to investors? US mutual fund performance and risk in recessions and expansions.The Quarterly Journal of Finance.1(03). pp.607-664.
• Hoepner, A.G., Rammal, H.G. and Rezec, M., 2011. Islamic mutual funds’ financial performance and international investment style: Evidence from 20 countries.The European Journal of Finance.17(9-10). pp.829-850.
• Agapova, A., 2011. Conventional mutual index funds versus exchange-traded funds.Journal of Financial Markets.14(2). pp.323-343.
• Chen, Y., Ferson, W. and Peters, H., 2010. Measuring the timing ability and performance of bond mutual funds.Journal of Financial Economics.98(1). pp.72-89.
• Bogle, J.C., 2015.Bogle on mutual funds: New perspectives for the intelligent investor. John Wiley & Sons.
• Gil-Bazo, J., Ruiz-Verdú, P. and Santos, A.A., 2010. The performance of socially responsible mutual funds: the role of fees and management companies.Journal of Business Ethics.94(2). pp.243-263.
• Nohel, T., Wang, Z.J. and Zheng, L., 2010. Side-by-side management of hedge funds and mutual funds.Review of Financial Studies.23(6). pp.2342-2373.