Art 1 Tasks: Discuss How The Following Should

Art 1 Tasks in General Terms Discuss How The Following Should be Taken

Art 1 Tasks in general terms, discuss how the following should be taken into consideration when constructing an investment portfolio: Age, income, debt level and assets, marital status, parental status, risk tolerance, time horizon, and general economic conditions.

Part 2 Tasks

Task 1

Discuss the efficient market hypotheses, and answer the following question: Does this hypothesis support active trading or buying a passive stock index fund?

Task 2

Discuss several pieces of legislation that were enacted to protect against unethical investing practices.

Task 3

To illustrate your knowledge of portfolio construction, design a portfolio based on the following scenario: Robert and Susan Jenkins have inherited $200,000. They are aggressive investors with a joint annual income of $100,000, no debt, and an additional $500,000 in assets other than the $200,000 inheritance. Design 2 separate $200,000 portfolios based on the following scenarios:

• The couple has 3 children between the ages of 9 and 17 years old, and they will use this money to pay for their college education.
• The couple will use the money to help fund retirement in 35 years.

When designing your portfolios, be sure to keep the following in mind: Each portfolio should contain at least 3 common stocks, 1 American Depositary Receipt (ADR) that you researched, and 3 bonds. Leaving a portion of the portfolio in cash is an option if you feel that is it appropriate.

Charts and graphs should be used where appropriate. Portfolio models should be based on the Jenkins’ demographic profile and time horizon. Be sure to include the following in your discussion: Reasons for your investment choices, stock and bond investment risk and return factors, the security market line, beta and standard deviation, bond duration and interest rates.

Part 3 Tasks

Generate a brief discussion of the following concepts: Dividend discount model, Capital asset pricing model (CAPM).

Paper For Above instruction

Constructing an effective investment portfolio requires a comprehensive understanding of various personal, economic, and market factors. When developing an investment strategy, certain key considerations should be taken into account: the investor's age, income level, debt status, assets, marital and parental status, risk tolerance, investment time horizon, and the overall economic context. These variables influence portfolio diversification, asset allocation, and risk management, ensuring the portfolio aligns with the investor’s financial goals and personal circumstances.

Age plays a pivotal role, as younger investors can typically tolerate higher risk due to a longer investment horizon, enabling them to recover from market fluctuations. Conversely, older investors often prefer less risky assets to preserve capital. Income levels impact the capacity to invest and determine saving rates, while debt levels influence liquidity needs and investment flexibility. Assets held outside investments, such as property or savings, can serve as additional security buffers or funding sources.

Marital status can affect financial planning, especially concerning joint assets, liabilities, and estate considerations. Parental status influences educational planning, leading to allocations for college savings. Risk tolerance varies among individuals; some investors prefer aggressive strategies with higher potential returns but increased volatility, while others favor conservative approaches focused on capital preservation. The investment time horizon, whether short-term or long-term, guides asset allocation—longer horizons tend to favor growth-oriented assets such as stocks, whereas shorter horizons might prioritize bonds and cash.

Economic conditions, including interest rates, inflation, and market stability, further shape portfolio strategies. For instance, during inflationary periods, real assets like commodities may be favored. Understanding these factors allows investors to tailor their portfolios to their specific needs and world economic trends, optimizing performance and mitigating risks.

Efficient Market Hypotheses and Investment Strategy

The Efficient Market Hypothesis (EMH) suggests that financial markets are "informationally efficient," meaning that asset prices reflect all available information at any given time. According to EMH, consistently achieving above-average returns through active trading is highly unlikely, as any new information is quickly incorporated into asset prices. This hypothesis supports the notion that passive investment strategies—such as investing in broad market index funds—are more appropriate for most investors. Active trading often incurs higher costs and taxes, with little evidence to indicate consistent mastery over market movements; thus, passive investing aligns with EMH principles, promoting diversification and low-cost management.

Legislation Against Unethical Investing Practices

Several legislative measures have been enacted to protect investors and promote ethical investing practices. The Securities Act of 1933 was a foundational law requiring transparency in securities offerings, ensuring investors receive accurate information. The Securities Exchange Act of 1934 established the Securities and Exchange Commission (SEC), empowered to regulate securities markets and enforce laws against fraud. The Investment Advisers Act of 1940 set standards for ethical conduct among financial professionals and increased transparency. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced comprehensive measures to mitigate systemic risk, enhance disclosure, and protect consumers. The Sarbanes-Oxley Act of 2002 aimed to improve corporate accountability and prevent fraudulent financial reporting. These laws collectively foster an environment of transparency, fairness, and investor protection.

Portfolio Design for Inherited Funds: Scenarios

In designing portfolios for the Jenkins couple, their aggressive investment profile and specific financial goals—funding college education for their three children and retirement in 35 years—must be considered. For the college savings scenario, a more conservative, growth-oriented portfolio is appropriate, balancing risk with the need for capital preservation to fund their children’s education. For the retirement scenario, a more aggressive growth strategy aligns with the long time horizon, allowing for higher risk up to an acceptable level.

The college education portfolio can include high-growth stocks such as technology and healthcare companies, supplemented with a select ADR—such as Alibaba (BABA)—to diversify international exposure. Bonds should include at least two corporate bonds with strong credit ratings and one municipal bond offering tax advantages. A portion in cash can provide liquidity and safety in the short term.

For the retirement fund, the portfolio should prioritize stocks with strong growth prospects, including at least three common stocks like Apple, Amazon, and Tesla. The ADR could be a global player such as Nestlé. Bonds should include at least three government or high-quality corporate bonds with varying maturities to manage interest rate risk. The inclusion of cash or cash equivalents can help with rebalancing and liquidity needs.

Investment choices are driven by the risk-return tradeoff, with stocks offering higher potential returns but increased volatility. Bonds provide income and stability. The Security Market Line (SML) and beta help assess expected returns based on market risk. Beta measures a stock’s volatility relative to the market, while standard deviation quantifies risk. Bond duration and interest rates influence bond price sensitivity; longer durations imply greater risk in rising rate environments. Diversification, risk management, and alignment with time horizon are key to effective portfolio construction.

Concepts Brief: Dividend Discount Model and CAPM

The Dividend Discount Model (DDM) is a valuation method used to estimate the intrinsic value of a stock based on the present value of expected future dividends. This model assumes that dividends grow at a constant rate and provides investors with a framework to determine whether a stock is undervalued or overvalued relative to its current market price. The DDM is particularly useful for valuing mature, dividend-paying companies with stable earnings.

The Capital Asset Pricing Model (CAPM) explains the relationship between expected return and systemic risk expressed through beta. CAPM posits that the expected return of an asset is equal to the risk-free rate plus a risk premium, determined by the asset's beta multiplied by the market risk premium. CAPM aids investors in assessing whether an asset offers adequate compensation for its risk level and aids in portfolio diversification and asset allocation planning.

References

• Bodie, Z., Kane, A., & Marcus, A. J. (2021). Investments (12th ed.). McGraw-Hill Education.
• Fabozzi, F. J. (2017). Bond Markets, Analysis, and Strategies (9th ed.). Pearson.
• Graham, B., & Dodd, D. (2008). Security Analysis: Sixth Edition. McGraw-Hill Education.
• Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91.
• Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk. The Journal of Finance, 19(3), 425–442.
• Shleifer, A. (2000). Inefficient Markets: An Introduction to Behavioral Finance. Oxford University Press.
• U.S. Securities and Exchange Commission. (2020). Investor’s Guide to Legislation and Regulations. SEC.gov.
• Thompson, L. (2019). Securities Regulation and Law (7th ed.). West Academic Publishing.
• Fama, E. F., & French, K. R. (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives, 18(3), 25–46.
• Ross, S. A. (1976). The Arbitrage Theory of Capital Asset Pricing. Journal of Economic Theory, 13(3), 341–360.