Financial Analysis

Constraints

The proven economic theory of limited resources urges us to consider what limitations the client might have in funding their investment. The firm will need to know how big a pot it is working out of and what time horizons to work within. The client’s capital amount will be of utmost importance in determining the size of their portfolio. Time horizons as with how soon the investment can be liquidated will determine whether to invest in long-term or short-term financial instruments.

Company related issues

Investment discipline

UMUC Portfolio Management believes in the power of good research. Every investment made is supported by empirical market data, reached through thorough scrutiny of the market movements. This ensures we make well-informed investment decisions all the time.

Investment Strategy

Client needs

The client is ready to invest $100,000 for a five week period. The client appears to be risk neutral, wishing to invest in high risk investments but also mitigating the risk exposure by diversifying the portfolio. The client specified that the portfolio should have five investments to that end.

Financial Instruments

Given the five week time horizon, the company the firm should focus on acquiring short term securities that satisfy the client’s risk palate. I recommend investing in the derivatives market and non-government fixed interest borrowing. The derivatives market holds the most promise for riskiness and diversity. I identify bond futures, interest rate futures, currency futures and commodity options, especially gold and oil, as lucrative investment opportunities in the bond market.

The bond market will be affected by individual companies’ performance, interest rates by national economy movements, and currency rates by export and import trends in the country. Gold and oil futures always seem to be positively correlated in their price movements. All this makes for a highly diversified portfolio. The fact that each security is tied to a different industry reduces the systematic risk considerably. As for fixed interest investments, I am inclined towards the security of certificates of deposit (CDs). The rate of return on CDs is higher than for other non-government fixed interest borrowing financial instruments. They also fit the time horizon within which the client requires us to work.

I suggest we build an investment portfolio consisting of these five instruments since they are best tailored for the client’s goal of high return. The high return is feasible in the five week time horizon presented by the client, and the risk involved is mitigated by the diversity of the financial instruments and the industry within which they are marketed.

Asset allocation

The study by Brinson et al awoke the investment world to the importance of asset allocation to rate of return for a portfolio. The choice of how much of what investment to purchase lies ultimately with UMUC. Careful consideration should be given to the weight of each investment in the portfolio. This will call for several iterations in calculating the risk of the portfolio and the expected return with different combinations of the weights of the component investments. This should help identify the efficient frontier from which we can decide which combination of investments will lead to realizing maximum return with minimum risk.

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