This investment recommendation is made due to your recent request to provide
you, Mr. Gorham an optimal investment strategy. The report and its tailor made advice on a certain investment strategy are based on your personal evaluation and backgrounds, provided during our meeting in March 2006. Regarding capital appreciation as you major investment objective, your portfolio will consist of an appropriate mix of securitized assets. To achieve maximal capital appreciation due to your medium-risk tolerance level it is necessary to analyze the different asset categories used, to maintain risk-reward comparisons. During the allocation of the portfolio’s asset categories, a compromise is needed to between maximum return and risk avoidance.
Table of Contents
1. Terms of Reference
1.1. Underlying Assumptions
2. Asset Categories
2.1. Equities
2.2. Bonds
2.3. Property
2.4. Cash
3. Risk and Return
3.1. Risk and Return Trade-off
3.2. Personal Risk Tolerance
3.3. Risk Adjustment, Measurement and Analysis
4. Portfolio Management Techniques
4.1 Active Management Approach
4.1.1 Technical Analysis
4.1.2 Fundamental Analysis
4.2 Passive Management Approach
4.3 Explanatory Statement of our Choice
5. Investment Recommendation
5.1. Asset Allocation
5.2. Expected Returns
5.3. Hedging Tools
5.4. Behavioural Approach
6. Compendium
Objectives and Scope
The primary objective of this assignment is to provide a tailor-made investment strategy for a wealthy private customer, Mr. Gorham, based on his medium-risk tolerance and desire for capital appreciation. The paper explores various asset categories, evaluates risk-return trade-offs, and analyzes portfolio management techniques to determine the most suitable strategy for achieving long-term growth.
- Analysis of diverse asset classes including equities, bonds, property, and cash.
- Evaluation of risk measurement models and personal risk tolerance levels.
- Comparison of active versus passive portfolio management strategies.
- Development of a recommended asset allocation model focused on diversification.
- Integration of behavioral finance concepts to understand market fluctuations and irrational investor behavior.
Excerpt from the Book
4.1.1 Technical Analysis
Technical analysis, often also called Chartism, is an active way of managing the portfolio. Technical analysis is 100 per cent chart driven. That means in reverse technical analysts to take absolutely no account of fundamental factors (which are described later in detail). The operating mode is based on identifying patterns from charts of past prices and to reason that past patterns will repeat in the future.
Basically this approach is a further development of techniques used in the Elliot Wave and Dow Theory. Over time many new intricacies have been added to the basic theory, from quite easy methods to understand like using Bollinger Bands beside the chart to predict selling or purchasing times, to more difficult methods like using the chaos theory (Pilbeam 2005).
In the eyes of many market prospectors not supporting technical analysis this approach is much ado about nothing. This opinion is based on the fact that technical analysts do ignore fundamentals. Furthermore technical analysis is based on high churning costs because of the relatively short holding period of equity.
The biggest criticism though, is that there is no conclusive empirical evidence that it works, in other words a sheer lack of evidence. However, the approach still is very popular which could make it a self fulfilling prophecy (Malkiel 2003). Malkiel (same source) further stated in, like Fama already did in 1970, that if after trading costs are considered, the returns of technical analysis underperformed a buy and hold strategy.
Summary of Chapters
1. Terms of Reference: Defines the context of the investment advice provided to the client and outlines the foundational personal assumptions.
2. Asset Categories: Describes the various financial instruments available for the portfolio, including equities, bonds, property, and cash, emphasizing their roles in diversification.
3. Risk and Return: Examines the inherent risks in financial markets and the methods for measuring risk, such as standard deviation and the beta-factor.
4. Portfolio Management Techniques: Compares active and passive management styles, specifically analyzing technical and fundamental analysis to justify the choice of a passive approach.
5. Investment Recommendation: Provides a concrete strategy for asset allocation based on the client's profile, including expected returns and behavioral considerations.
6. Compendium: Summarizes the overall guidance provided and reiterates that the recommendations are based on systematic research.
Keywords
Portfolio Investment Strategy, Capital Appreciation, Risk Tolerance, Equities, Bonds, Property, Asset Allocation, Technical Analysis, Fundamental Analysis, Passive Management, Efficient Market Hypothesis, Behavioral Approach, Diversification, Hedging, Private Equity.
Frequently Asked Questions
What is the primary purpose of this work?
The work aims to develop an optimal investment strategy for a wealthy private client, Mr. Gorham, tailored specifically to his medium-risk tolerance and his objective of capital appreciation.
Which asset categories are covered in the strategy?
The document covers equities, bonds, property, and cash as the primary vehicles for building a diversified portfolio.
What is the recommended management approach?
The author recommends a passive management approach, citing lower costs and the lack of substantial evidence supporting the long-term success of active management.
How is risk measured within the portfolio?
Risk is measured primarily through the beta-factor and standard deviation, following principles of the Capital Asset Pricing Model (CAPM).
What role does the Efficient Market Hypothesis play?
The Efficient Market Hypothesis (EMH) serves as a theoretical basis for the preference of passive management and the understanding of market volatility.
What are the main themes of the investment strategy?
The core themes include risk assessment, asset diversification, cost-efficient management, and the integration of behavioral finance into investment decision-making.
How does the author explain irrational investor behavior?
The author discusses behavioral models, such as the representativeness bias and overconfidence, to explain why markets exhibit momentum and long-term reversal effects.
Why are private equity funds included in the recommended allocation?
Private equity is included to optimize the portfolio's diversification effect, helping to achieve a balance between different asset categories with low correlation.
- Quote paper
- Honours Bachelor of Arts Business Management Jonas Schirm (Author), 2006, Portfolio Investment Strategy - Investment brief for wealthy private customer, Munich, GRIN Verlag, https://www.grin.com/document/57357
