To get started on your portfolio project, you first need to develop an investment plan. Your plan should outline your investment strategy. Be sure to include as part of your plan objectives and strategies (types of assets, limitations, allocations, sources and so on). This policy will be used to guide your portfolio management project.© BrainMass Inc. brainmass.com October 24, 2018, 9:31 pm ad1c9bdddf
Why should you invest?
Simply put, one should invest so that your money grows and shields you against rising inflation. The rate of return on investments should be greater than the rate of inflation, leaving you with a nice surplus over a period of time. Whether your money is invested in stocks, bonds, mutual funds or certificates of deposit (CD), the end result is to create wealth for retirement, marriage, college fees, vacations, better standard of living or to just pass on the money to the next generation. Also, it's exciting to review your investment returns and to see how they are accumulating at a faster rate than your salary.
Factors for the choice of asset allocation
The amount that you invest will eventually depend on factors such as:
Your risk profile
Your Time horizon
The investment options before you are many. Pick the right investment tool based on the risk profile, circumstance, time zone available etc. If you feel market volatility is something which you can live with then buy stocks. If you do not want to risk the volatility and simply desire some income, then you should consider fixed income securities. However, remember that risk and returns are directly proportional to each other. Higher the risk, higher the returns.
Begin with an understanding of yourself.
What do you want from your investments?
It could be growth, income or both.
How comfortable are you to take risks?
It's only human if your first reaction on an adverse market movement is to sell and run away. To shield yourself against short term trading risks one has to take a long-term view. Renowned experts such as Benjamin Graham and Warren Buffet rarely shuffle their portfolio unless there is some change in the fundamentals of a company. Once you see the kind of returns you can generate over time, you'll come to realize that it really doesn't matter if your stock drops or rises over the course of a few hours or days or weeks or even months. Mutual funds are a good way to begin investing in the stock market. Funds render investment services with professionalism and give a good diversification over many sectors. If volatility is not your cup of tea, then you might consider buying fixed income securities.
Planning and Setting Goals: Investment requires a lot of planning. Decide on your basic framework of investments and chart your ...
The solution discusses investment portfolio projects. The objective and strategies of an investment portfolio project are determined.
Calculate the NPV of each project.
10-5. RejuveNation needs to estimate how long the payback period would be for their new facility project. They have received two proposals and need to decide which one is best. Project Weights will have an initial investment of $200,000 and generate positive cash flows of $100,000 at the end of year 1, $75,000 at the end of year 2, $50,000 at the end of year 3, and $100,000 at the end of year 4. Project Waters will have an initial investment of $300,000 and will generate positive cash flows of $200,000 at the end of year 1 and $150,000 at the end of years 2, 3, and 4. What is the payback period for Project Waters? What is the payback period for Project Weights? Which project should RejuveNation choose?
10-6. Calculate the NPV of each project in problem 10-5 using RejuveNation's cash flows and a 10 perecent discount rate.
10-7. The Bedford Falls Bridge Bilding Company is considering the purchase of a new crane. George Bailey, the new manager, has had some past management experience while he was the chief financial officer of the local savings and loan. The cost of the crane is $17,291.42, and the expected incremental cash flows are $5,000 at the end of year 1, $8,000 at the end of year 2, and $10,000 at the end of year 3.
a. Calculate the NPV is the required rate of return is 12 percent.
b. Calculate the IRR
c. Should Mr. Bailey purchase this crane?
10-8. Lin McAdam and Lola Manners, managers of the Winchester Company, do not practice capital rationing. They have three independent projects they are evaluating for inclusion in this year's capital budget. One is for a new machine to make rifle stocks. The second is for a new forklift to use in the warehouse. The third project involves the purchase of automated packaging equipment. The Winchester Company's required rate of return is 13%. The initial investment (a negative cash flow) and the expected positive net cash flows for years 1 through 4 for each project follow:
Expected Net Cash Flow
Year Stock Fork Pack
0 ($9,000) ($12,000) ($18,200)
1 $2,000 $5,000 $0
2 $5,000 $4,000 $5,000
3 $1,000 $6,000 $10,000
4 $4,000 $2,000 $12,000
Calculate the NPV and IRR of each project.
Which proejct(s) should be undertaken? Why?
10-10. Buzz Lightyear has been offered an investment in which he expects to receive payments of $4,000 at the end of the next 10 years in return for an initial investment of $10,000 now.
What is the IRR of the proposed investment?
What is the MIRR of the proposed investment? Assume a cost of capital of 15 percent
Assume that a company has an existing portfolio A with an expected return of 9 percent and a standard deviation of 3 percent. The company is considering adding an asset B to its portfolio. Asset B's expected return is 12 percent with a standard deviation of 4 percent. Also assume that the amount invested in A is $700,000 and the amounts to be invested in B is $200,000. If the degree of correlation between returns from portfolio A and project B is zero, calculate:
a. The standard deviation of the new combined portfolio and compare it with that of the existing portfolio.
b. The coefficient of variation of the new combined portfolio and compare it with that of the existing portfolio.
Assume the risk-free rate is 5 percent, the expected rate of return on the market is 15 percent, and the beta of your firm is 1.2. Given these conditions, what is the required rate of return on your company's stock per the capital asset pricing model?View Full Posting Details