Investment Management

Executive Summary of Miss Jean Brown Portfolio and Construction Review

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

Introduction.

Part A -Research.

Portfolio structure.

Steps in the construction of an efficient portfolio.

Application of theory.

Part B..

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.

Recommendation.

Conclusion.

Reference list

Introduction to Miss Jean Brown Portfolio and Construction Review

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. 

Portfolio Structure

Based on the objectives of the investors, the selection of the portfolio is being determined. The objectives include:

  1. Current income and asset mix - Most of the investment is being made in debt instruments, and the rest is being made on equity which ascertains the adequate amount of the current income. As per the critical recommendation of Fehr and Hofmann (2020), tenure choice, stock market investment, as well as the public social security system, is required to be understood for the optimal management of risks in retirement.
  2. Growth of the income and the asset mix - For reducing risks and getting tax exemption, the debt is being included. Because the capital is being invested, the investors require a growth percentage in the income.
  3. Capital appreciation and asset mix - Liquidity is one of the central problems that may arise in the investment process, which gives faster capital appreciation. Therefore, the value of the investment that is being made increases year after year and the value of the shares is found to be low as compared to that of the original issuing price of the shares. 
  4. Analysis of risk and return - It is said that the higher chances of the risk occurrence ensure the higher amount of return for the investors. Therefore, investors are required to measure the number of risks before the facilitation of the investment opportunity.
  5. Diversification - The unsystematic risk is minimized, which is the primary advantage of diversification. It is the step that is being determined after the maintenance of the risk-return relationship.
  6. Safety of principal and asset mix- the stability of the principle is being established for safety for the investors. In contrast to the above view, Cagas et al. (2019) mentioned that the development of the bond market would ensure in shaping the portfolio structure and reducing the liquidity risks exposure.

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.

Steps in The Construction of An Efficient Portfolio

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:

  1. Assessing the current situation - An observation is being required at present, investment, the debt plan as well as the shifting through all the current assets according to which the investment option is to be evaluated by the investors.
  2. Establishing investment goals - A specific goal is required to be established before the facilitation of the investment process. Based on the set goal, the investment is required to be made by the investors for the ascertaining of the desired return from the investment.
  3. Determining Assets Allocation - The allocation of the assets is being set according to the risk and the volatility of the market. This will further result in reducing the chances of loss for the investors. As per the critical suggestion of Byrne and Smudde (2018), the advisers are required to understand the goals of investment of the client, resources, constraints as well as circumstances for the building of an efficient portfolio for investment.
  4. Selection of the Investment Options - According to the parameters of the asset allocation strategy, the investment options are required to be adopted by the investors. The preferences of active and passive management also result in the determination of the specific investment type.
  5. Measuring and rebalancing - The performance of the portfolio is required to be monitored and measured at a regular interval for the determination of the best return on the investment process. On the contrary to the above view, Chen and Yuan (2016) opined that efficient selection of the portfolio in the large market is important for the reduction of the risk and increase in the amount of return.

Application of Theory

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.

1.i Personal Details

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.

1.ii. Investment Objectives and Goals

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.

1.iii Risk Profile

  • According to this case study, the most significant risk is that the woman has just retired and currently has no income. In this case, the woman did not keep any financial backup for herself except in her home.
  • Secondly, the woman has spent most of her savings on building a house, and as a result, she does not have much money to invest. The more money that can be invested in investment, the higher the chances of profit, but in this case, it is not possible to invest more money.
  • Australia's current financial situation is very volatile, sometimes it going up and sometimes going down. In that situation, if they invest in the wrong place or at the wrong time, they can face huge losses, which is never desirable to retire older woman.
  • At present, the income of all the companies is at the bottom for COVID 19. In this pandemic situation, all the companies have stopped their production process for a long time; as a result, they have suffered financial losses. There are many doubts about how much profit this woman will get if they invest in a company in this situation.

2.i Australian Domestic Economic Situation

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).

2.ii Expected Returns and Risks

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.

3. Recommended Investment Portfolio

  1. The financial report of a company should always be checked before investing, and it is necessary to be aware of the financial assets of that company. As mentioned by Preston and Wright (2019), financial assets are the most crucial factor behind the success of a company because the more it improves, the more profit margins it can earn. Therefore, in this volatile financial situation, they should also check the status of the financial assets of Australian companies.
  2. During this economic downturn, they should look for an industry where profit margins continue to grow year-round, such as the food industry, the construction industry. If this woman wants to earn $75,000 a year and save a total of $20 million, then they should invest money in such an industry.

4. Expected Annual Returns

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).

5. The Risk Relating Recommendation Portfolio

  1. As opined by DiGiacomo et al., (2019), the current situation shows that the Australian tourism industry is making more money than any other industry. Therefore, in this case, this woman and the financial controller should invest in the tourism industry to get a higher return.
  2. According to Barr et al. (2019), most of the big Australian companies are driven by foreign currency because it is possible to make more profit. Therefore, in the case of making more profit, the woman can invest in foreign food companies in the hope of making more profit.
  3. On the other hand, they can buy shares and sell them at a higher price. In this case, the market situation does not affect, and the woman can make more money from that.

6. Annual Review of The Portfolio

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.

Recommendation on Miss Jean Brown Portfolio and Construction Review

  1. As opined by Zander et al. (2019), investors should pay close attention to the financial activities of the company before investing. In this case, in addition to the financial report, they can take decisions from other shareholders or stakeholders. In this work, it is possible to get more authentic and relevant information about the company.
  2. Since the woman is a retiring person and currently has no income, they should only invest with financial backup. Therefore, they can easily spend the rest of their lives with less income or less return from the company.
  3. When it comes to investing, they should look for an industry that can make a profit all year round, meaning they have no downgrade, such as hotel and hospitality industry, food industry (Gleeson et al., 2019). COVID 19 has not had much of an impact on these industries, and they are making very comfortable profits.
  4. Australia's tourism industry is an industry where this woman can invest her money. Most of Australia's net GDP comes from the tourism industry (Burns et al., 2019). Therefore, if they invest their money in a company in the tourism industry, they will be able to earn a lot of revenue.

Conclusion on Miss Jean Brown Portfolio and Construction Review

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.

Reference List for Miss Jean Brown Portfolio and Construction Review

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

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