The report has focused on providing investment advice to Miss Jean Brown for reducing the risk factors and increasing the amount of return from the investment process. There are some important steps to be followed for the construction of an efficient portfolio. This report cites a case study that depends on the financial activity of an Australian woman. According to the case, Miss Brown wants to invest some of her savings in the market after retiring, and for that, there is a consultation with financial control. According to this report, this woman may face various difficulties in investing, which are mentioned in this study.
Table of Contents
Part A -Research.
Steps in the construction of an efficient portfolio.
Application of theory.
1.i Personal details.
1.ii. Investment objectives and goals.
1.iii Risk profile.
2.i Australian domestic economic situation.
2.ii Expected returns and risks.
Recommended investment portfolio.
4.Expected annual returns.
The risk relating recommendation portfolio.
Annual review of the portfolio.
Portfolio construction deals with the techniques of selecting securities through talking minimum risks in order to achieve maximum return. Bonds, stocks and money market instruments are some of the securities that are being included in the portfolio. The portfolio investment is being planned by considering all the current assets, investment and debts that are being acquired. Based on the extent of risks and the volatility of the market, the investment portfolio is being decided. As per the case study, Miss Jean Brown seeks investment advice after getting retired, that is to be covered by the study. The selected methodology used by the report is investment advice that is being required by Miss Jean Brown for her investment option.
Based on the objectives of the investors, the selection of the portfolio is being determined. The objectives include:
Thus, as per the case study, Miss Jean Brown ensures in paying off the mortgaged on her apartment from her savings and therefore, she does not have any debt now. Later she decided to spread her funds on the different types of assets classes that include Australian Securities that is Australian company shares, Real estate investment trust, Australian fixed interest securities and the Australian cash and cash equivalents. The portfolio structure is being determined according to which the investment decision can be made by her.
Certain steps are required to be determined for the creation of a long-term investment strategy for getting the desired results. This step results in the evaluation of clarification about the future investment strategy. Therefore, the deliberate and precise process of portfolio planning is required for constructing an investment portfolio. The different steps include:
Markowitz Theory (1956)
An efficient frontier is being set for the optimal portfolios that ensure in offering the maximum amount of return through the reduction of the risks. As per the critical suggestion of Kapoor and Prosad (2017), this theory results in understanding the situation of the stock market by restricting the traditional financial approaches that further impacts in bridging the gap between the real situation and the investment options. Therefore, before the making of the investment process, the investors are required to understand the importance of the Markowitz Theory (1956) for better portfolio selection. Some of the important steps that are being involved in the model include Security valuation, asset allocation, and portfolio optimization as well as performance measurement. On the contrary to the above view, Pfiffelmann et al., (2016) suggested that the behavioural portfolio ensures in meeting the Markowitz theory for the creation of variance and compares the allocation of the assets. Apart from this, it can be said that this theory ensures in discovering the efficient frontier for the creation of lines from the risk-reward graph that is being composed of the optimal portfolios. Highest expected rate of return is being determined by the investors while making use of this theory by reducing the given amount of risks.
Miss Jean Brown is a retiring woman who was born on December 30, 1954, in Australia. After retire, this woman has built a house by using all deposited amount of bank, and the current price of this house is $10 million. This lady does not have any income at present, but this lady wants to find a way to earn some income for the rest of life. According to the case study, this woman is now 65, so at this age, this lady will not get a job anywhere.
Although the woman is planning to invest in some places for some income and discusses this with a financial controller. As mentioned in the case study, this woman wants to invest some of her accumulated capital in the market and earn $75,000 per year. The woman thinks that by saving this money, she will earn a total of $20 million so that the rest of her lift can be easily cut. However, for this investment, this woman takes the help of the financial controller to understand where they can make a good profit by investing.
The Australian economy is one of the fastest-growing economies in the world. However, in 2019, the GDP growth of the Australian economy has fallen when compare it with 2018. In 2018, the GDP growth of Australia had 2.7%, and the net GDP has $1.376 trillion (Nong, 2019). However, in 2019, the rate of GDP has fallen to 1.8%, and the amount of net GDP is $1.362 trillion (Calopedos et al., 2019). One of the reasons for Australia's GDP decline is that market demand has fallen, and companies have not been able to make much profit (Refer to Appendix 1).
This downward use of GDP proves that companies are not able to make much profit as well as demand in the market. In this case, if this woman invests their money in a company hoping for more profit, they may fail to do so. The main reason for this is that the profit margins of the companies have decreased a lot, so they have been forced to reduce the money received by their shareholders.
According to the case study, this woman wants to earn a total of $20 million which will leave in the name of their granddaughter. In this case, the woman thinks that they must earn $75,000 a year to save this amount. According to estimates, it may take another 27 years for them to save this money. In this case, they can invest in different companies without investing all the money in the same company, which may reduce the risk factor a bit. Besides, they can earn money in less time if they follow this strategy.
In this pandemic situation, as most of the companies have stopped production processes, their profit margins have come down drastically. In this case, they should select some companies for investment where service is given more priority in product development, such as the hotel and hospitality industry (Nghiem et al., 2019).
As mentioned in the case study, after retiring, the woman spends most of the savings on building home and the rest they want to invest in a company. But according to estimates, he may have to spend another 27 years to make that much money, which could be a risk for them. In this case, they can buy the shares of a famous company and sell it to someone else at a higher price, and it is possible to make more profit. In this case, they can reach their goal in a short time and save more money in 27 years.
From the above study, it can conclude that Miss Brown, an Australian woman, wants to invest her money in a company to save more money after retiring. However, this lady spends all savings on developing their house, which is currently worth $10 million. This woman wants to invest some of the surviving money in the market, and from there, they want to earn $75,000 per year. They have set a target that they want to earn a total of $20 million. They want to keep this money in their granddaughter's name so that they can share it later.
According to the case study, it may take them a total of 26 years to collect this total. On the other hand, the Australian financial situation has been slightly downgraded compared to 2018 so that the woman cannot earn more revenue. Therefore, they think they want to invest in some industry where they can get more money, such as the tourism industry, hotel and hospitality industry. Given the current situation in Australia, it is possible to get much higher returns from these industries. On the other hand, even in the COVID 19 situation, these industries are making enough possible profit, so this woman wants to invest in these industries.
Barr, N., Chapman, B., Dearden, L. and Dynarski, S., (2019). The US college loans system: Lessons from Australia and England. Economics of Education Review, 71, pp.32-48. Available at https://www.sciencedirect.com/science/article/pii/S0272775718301778 Accessed on 16.9.2020
Burns, F., Soh, N.L., Shackel, R. and Walter, G., (2019). Financial and caregivers’ stressors in Australian law students–a qualitative analysis. Psychiatry, Psychology and Law, 26(3), pp.343-354. Available at https://www.tandfonline.com/doi/abs/10.1080/13218719.2018.1485525 Accessed on 16.9.2020
Byrne, A. and Smudde, F.E., 2018. Basics of Portfolio Planning and Construction. CFA Institute.
Cagas, M.A., Park, D. and Tian, S., 2019. Bond market development, bank portfolio structure and liquidity risk.
Calopedos, R.J., Bang, A., Baade, P., Yu, X.Q., Ruthven, S., Patel, M.I. and Smith, D.P., (2019). Patterns of prostate‐specific antigen testing by remoteness of residence and socio‐economic status: An Australian population‐based study. Australian Journal of Rural Health, 27(3), pp.216-223. Available at https://onlinelibrary.wiley.com/doi/abs/10.1111/ajr.12504 Accessed on 16.9.2020
Chen, J. and Yuan, M., 2016. Efficient portfolio selection in a large market. Journal of Financial Econometrics, 14(3), pp.496-524.
DiGiacomo, M., Chang, S., Luckett, T., Agar, M., Phillips, J. and Lam, L., (2019). Financial stress experienced by informal carers of adults with a chronic disease: Results from an Australian population‐based cross‐sectional survey. Australasian Journal on Ageing. Available at https://onlinelibrary.wiley.com/doi/abs/10.1111/ajag.12739 Accessed on 16.9.2020
Fehr, H. and Hofmann, M., 2020. Tenure choice, portfolio structure and long-term care–Optimal risk management in retirement. The Journal of the Economics of Ageing, 17, p.100240.
Gleeson, D., Townsend, B., Lopert, R., Lexchin, J. and Moir, H., (2019). Financial costs associated with monopolies on biologic medicines in Australia. Australian Health Review, 43(1), pp.36-42. Available at http://www.publish.csiro.au/ah/AH17031 Accessed on 16.9.2020
Kapoor, S. and Prosad, J.M., 2017. Behavioural finance: A review. Procedia computer science, 122, pp.50-54.
Nghiem, S., Khanam, R., Vu, X.B. and Tran, B.X., (2019). Implicitly estimating the cost of mental illness in Australia: a standard-of-living approach. Applied Health Economics and Health Policy, pp.1-10. Available at https://eprints.usq.edu.au/37176/3/Manuscript_Version6-Clean.pdf Accessed on 16.9.2020
Nong, D., (2019). A general equilibrium impact study of the Emissions Reduction Fund in Australia by using a national environmental and economic model. Journal of Cleaner Production, 216, pp.422-434. Available at https://www.sciencedirect.com/science/article/pii/S0959652619302094 Accessed on 16.9.2020
Pfiffelmann, M., Roger, T. and Bourachnikova, O., 2016. When behavioral portfolio theory meets Markowitz theory. Economic Modelling, 53, pp.419-435.
Preston, A.C. and Wright, R.E., (2019). Understanding the gender gap in financial literacy: Evidence from Australia. Economic Record, 95, pp.1-29. Available at https://onlinelibrary.wiley.com/doi/abs/10.1111/1475-4932.12472 Accessed on 16.9.2020
Zander, K.K., Simpson, G., Mathew, S., Nepal, R. and Garnett, S.T., (2019). Preferences for and potential impacts of financial incentives to install residential rooftop solar photovoltaic systems in Australia. Journal of Cleaner Production, 230, pp.328-338. Available at https://www.sciencedirect.com/science/article/pii/S0959652619316592 Accessed on 16.9.2020
Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help
Proofreading and Editing$9.00Per Page
Consultation with Expert$35.00Per Hour
Live Session 1-on-1$40.00Per 30 min.
Doing your Assignment with our resources is simple, take Expert assistance to ensure HD Grades. Here you Go....
Get Flat 10% Discount Upto A$50 on all Assignment Orders:
Get 20% OFF upto A$40 on your First Assignment order.
Get 500 Words Free on your Assignment: