First Task: Post Your Key Assignment Outline ✓ Solved

First Task Is To Post Your Own Key Assignment Outline plan

First Task Is To Post Your Own Key Assignment Outline/plan

DUE 12/09/2015 Your first task is to post your own Key Assignment Outline/plan for the Phase 4 project.

Part 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
  • 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

Paper For Above Instructions

Constructing an investment portfolio is a multifaceted process that requires careful consideration of various factors, including age, income, debt level, marital status, parental status, risk tolerance, time horizon, and general economic conditions. Each of these components plays a crucial role in shaping the overall investment strategy. For instance, younger investors may have a higher risk tolerance and a longer time to recoup potential losses, while older investors might favor more conservative investments as they approach retirement.

Part 1: Factors to Consider in Portfolio Construction

The first factor to consider is age, as it directly impacts the risk tolerance and investment strategy. Younger investors typically can afford to take on more risk due to their longer investment horizon. Income is another essential element; higher income can offer more flexibility in investment choices and can afford higher-risk assets. Debt levels and existing assets influence one's financial stability and capacity for risk. Marital and parental statuses can further dictate investment goals, such as saving for children’s education or retirement planning, affecting both risk tolerance and time horizon.

Part 2: Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH) posits that stock prices reflect all available information. According to this theory, active trading strategies would not consistently outperform passive index investing, as any potential advantage would be mitigated by market efficiency. Therefore, for investors like Robert and Susan Jenkins, who may have aggressive investment goals and a long-term horizon, a passive strategy such as investing in a stock index fund may be more beneficial.

Part 3: Legislation Against Unethical Investing Practices

Several pieces of legislation have been implemented to protect investors against unethical practices. The Securities Act of 1933 aimed to ensure transparency in financial statements, while the Securities Exchange Act of 1934 established the Securities and Exchange Commission (SEC) to regulate the securities industry and prevent fraud. Moreover, the Sarbanes-Oxley Act of 2002 introduced stricter regulations on corporate governance and financial disclosures to protect investors from inaccuracies.

Part 4: Portfolio Design for Robert and Susan Jenkins

In constructing a portfolio for Robert and Susan Jenkins, it is necessary to consider their aggressive investment profile and current financial situation. For the first scenario, where they aim to fund their children's education, a higher allocation of equities may be appropriate due to the longer time horizon. A potential structure could be:

  • Common Stocks: $100,000 in three stocks, such as Apple Inc. (AAPL), Amazon.com Inc. (AMZN), and Microsoft Corp. (MSFT).
  • ADR: $20,000 in Alibaba Group Holding Ltd (BABA).
  • Bonds: $60,000 in U.S. Treasury bonds and corporate bonds.
  • Cash Reserve: $20,000 for liquidity.

For their retirement in 35 years, a portfolio variation might focus more on income-producing assets, such as:

  • Common Stocks: $80,000 in large-cap stocks like Johnson & Johnson (JNJ), Pfizer Inc. (PFE), and Procter & Gamble Co. (PG).
  • ADR: $20,000 in a well-performing international stock.
  • Bonds: $80,000 across municipal bonds and high-yield bonds.
  • Cash Reserve: $20,000 for market fluctuations.

Investment Choices Explanation

The reasoning behind these selections hinges on performance potential and their alignment with the Jenkins' risk tolerance and financial goals. Key concepts like the security market line indicate the expected return based on systematic risk (beta), and standard deviation helps measure the volatility of the stocks included. Furthermore, bond duration and interest rate interactions will also impact these portfolios over time.

Conclusion

In summary, constructing an effective investment portfolio requires a deep understanding of personal financial situations and market dynamics. By considering factors such as age, income, and risk tolerance, one can tailor a strategy that meets specific goals, whether it be funding education or preparing for retirement. Adhering to legislation protecting investors against unethical practices, as well as utilizing wise investment strategies can further bolster portfolio performance.

References

  • Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments. McGraw-Hill Education.
  • Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance.
  • Markowitz, H. (1952). Portfolio Selection. The Journal of Finance.
  • Malkiel, B. G. (2003). The Efficient Market Hypothesis and Its Critics. Journal of Economic Perspectives.
  • Securities and Exchange Commission. (n.d.). Brief History of the SEC. Retrieved from [SEC website url]
  • Li, C., & Yao, R. (2019). Risk Tolerance and Gender Differences in Investment Decision Making. Journal of Behavioral Finance.
  • Schiller, R. J. (2000). Irrational Exuberance. Princeton University Press.
  • Appel, L., & Petajisto, A. (2016). Active Mutual Funds and Their Role in Investment. The Journal of Portfolio Management.
  • Black, F., & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy.
  • Huang, S. & Liao, F. (2021). A Study of Risk and Return Factors in Equity Markets. International Review of Financial Analysis.

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