The improvement in the economy is expected to continue for the next three years. This is after the financial crises that affected our economy. The improvement of the economy is experienced worldwide and the stock market is expected to experience growth to recover the losses the incurred. The investor will experience real growth in the economy through the stock exchange. This will be measured by the economic value of the shareholders. Although at the moment we did not have abnormal economic growth it is enough for an investor to take up shares or stocks that are being traded up in the market. This is reflected by the unemployment rate which has come down to 8.4 which is lower than the 10.2 which was reported some time back. Inconsideration of these factors, I believe the economy will improve and the investor should put his money in investment which will give return for money.
PROTFOLIO
The customer will be advised to invest in a portfolio which is favorable to his income. The portfolio must be a good diversification where risk will be reduced then stocks will be selected which include,
Why diversification reduces portfolio risk as measured by the portfolio standard deviation is important and worth exploring in some detail. The key concept is correlation, which is the extent to which the returns on two assets move together. If the returns on two assets tend to move up and down together, we say they are positively correlated. If they tend to move in opposite directions, we say they are uncorrelated.
The correlation coefficient, which we use to measure correlation, ranges from -1 to 1, and we will denote the correlation between the returns on two assets, say A and B, as Corr(RA,RB). The Greek letter p(rho) is often used to designate correlation as well. A correlation of 1 indicates that the two assets have a perfect positive correlation.
A zero correlation means that the two assets are uncorrelated. If we know that one asset is up, then we have no idea what the other one is likely to do there simply is no relation between them. Perfect negative correlation Corr(RA,RB) -1 indicates that they always move in opposite directions.
CLIENT
The client is asking me, the financial agent, to build an income portfolio, which will allow her to have a lump sum at the end of the two years. The client is young and currently employed. The client saved 100,000 to purchase a house. The client is very concerned about the fluctuations in the economy and would like to protect her investment. She would like to see tangible improvements in her investment. The goal of my client is to use the investment as a down payment on a home within two years. My client also wishes to retain the investment as fore these two years with a flexible-weightings approach which will allow the agent, to periodically adjust the weights of the assets.
OUR STRATEGY
As the clients agent I have proposed to invest in mutual fund, stocks and bonds on this investment. The first basket contains five high yield accumulative preferred stocks. The second basket contains ten high yield common stocks. Upon comparison between the seven preferred stocks, I have chosen the highest rated, five. In addition, I also compared 17 different common stocks and then chose the highest rated ten stocks. In order to make an accurate comparison, as the agent, I divided the date into four categories. The first category compared the daily-expected return with the standard deviation that was taking form the past five years. The second category compared the current ratio, the DE, and the EPS. The third category compared each of the companys NPM and the ROI, along with the asset turnover. The last category is the correlation analysis and comparisons of the stocks. In all the statistics, I assumed that the client would like to reinvests the current income by the same structure.
SCENARIOS
After choosing the stocks, submitted three scenarios to my client. The first scenario consists of 90 common stocks and 10 of preferred stocks. The second scenario consists of 80 common stocks and 20 of preferred stocks. The third scenario consists of 50 common stocks and 50 preferred stocks.
The graph shows the three scenarios, expected returns, and their standard deviations. As the figure above shows, when the expected return increases, the risk also increases. In order to pick the scenario that best suits the client, I, acting as the agent, compared each of the scenario by using standard performance measures by considering the two years treasury note as the risk free rate.
I invested a total of 100 000 in various mutual funds FTSE NAREIT INDUSTRIALOffice Capped Index Fund (FIO), SP Global Technology Sector Index Fund (IXN) and Russell 2000 Growth Index Fund. My choice of these funds was based on their outstanding performance. According to IShares.com the performance of these mutual funds has always been on the upward trend in the past years and their potential to grow can not be over emphasized.
FTSE NAREIT IndustrialOffice Capped Index Fund (FIO) looks for investment results that are in accordance to yield performance and price prior to expense and fees of FTSE NAREIT IndustrialOffice Capped Index.
SP Global Technology Sector Index Fund (IXN) looks for investment outputs that match up with yield performance and price, prior to expenses and fees, of corporations that standard and poors considers to be part of information technology facet of the economy and significant to world market. This consideration depends on the representation of the Standard Poors Global Information Technology Sector Index. The index is part of Standard Poors Global 1200 Index.
On the other hand, Russell 2000 Growth Index Fund looks for investment results that are in accordance to yield performance and cost prior to expenses and fees that small capitalization growth sector of the United States of Americas equity market as characterized by Russell 2000 Growth index. This index represents about 50 of the Russell 2000 index (IShares.com).
Once I had completed the performance analyses, I present mu client with scenario one as being the best financial option with which to meet her financial goals. Scenario one has higher excess return in Jensen Alpha graph. Although this scenario performs the poorest with the Sharpe and Treynor ratios, it has an expected daily return of 0.056 and its standard deviation is 0.01063. Lastly, scenario one has a beta of 0.733.
ALTERNATIVES BENCHMARKS
Due to the type of this investment, the NYSE composite index has a benchmark for the portfolio since it contains both preferred and common stocks. Also, since the portfolio is an income portfolio, the best alternatives are bonds. I will advise my client to use the HCA Inc bond as her best alternative. The graph below shows the yield for the portfolio, the benchmark, and the alternative.
As shown above, the portfolio has higher expected return than the benchmark and the alternative investment.
PREFFERRED STOCK BASKET
As the clients agent and after full analysis, I respectfully choose the following preferred stock
COMPARING PREFERRED STOCKS STRATEGY
To successfully achieve in investing in socks best market prediction abilities must be put into use. However choosing the best stock is not essay (E-trade.com). To be successful I will use fundamental stocks analysis and stock market trend technical analysis as my strategic pillars to strategies and invest the 10,000 stocks. Fundamental stocks analysis is based on returns on assets, priceEarnings ration, return on equity, PEG ratio, and earning per share. I will depend on this metrics because they pinpoint the features of best stocks before making huge short term gains. I will aim at making the most out of the stork on short term basis and therefore will keenly observe the trends of stocks. I will avoid holding on stocks for long as I will always offload then once their prices promise a certain percent of profit on my initial investment. Also I will always dispose stocks whenever their prices show an indication of declining and by them back once the prices have declined or stabilized bellow the original price.
Earnings per share are the ratio of the named companies to the number of its outstanding stocks or rather the number of stocks in possession of its stockholders. This ration indicates the companies profitability. Its values should not be less that 80 and if a company has maintained this accompanies with good growth fro the last ten years, it is likely to continue doing so for the next five years.
PriceEarnings ration- PE ratio is the companys ration of its share price to each shares earnings. This parameter measures total amount investors are ready to pay for every dollar earned. Te best stocks to invest ones money in are those that have a higher PE in comparison to the industries, or markets average.
PriceEarnings to growth ratio PEG ration is also very important. It is the PE divided by the projected year to year growth in earning and it indicates the price of the stock. Its value however should be less than one.
Return on equity on the other hand the return on the shareholders investment calculated for twelve months and it indicates how profitable a company is. The recommended value for return on equity should not be less than 15. However, ROE can be very misleading and can end up overweighting a portfolio with high debt stocks if it applied without putting the other factors in consideration.
Return on assets (ROA) is the total net income divided by the companies total assets. This value indicates the profitability of a company in relation to its assets. The recommended value for ROA is 20 or higher however investors are always advised to keep of companies whose ROA is bellow 5.
These parameters will be my guidelines while investing and trading in stocks. The will guide me as a monitor my stock and determine which one to offload and the new stocks to acquired from the market.
Final portfolio
I will also invest a total sum of 100, 000 from the imaginary fund in bonds. I bought Arbitrage R ABRFX fund bonds at a maximum limit of 100, 0000. This fund looks out to profit from acquisitions and mergers (Morningstar.com). It purchases acquired company stocks and shorts the acquisitor.m as a result the fund gains by the benefit of the spread,. It has a tiny asset base and this has made it to focus on small or micro-capital. Arbitrage fund was more appalling due to lower expense ration (Halpern).
The expenses have been cut although they may be reduced further. This could however pose a risk to the fund due to tax inefficiency and persistent costly brokerage commissions. Failure of merger has can lead to shrinkage of returns. Also the world mergers and acquisition worldwide has increased in complexity. The fund has also has low volatility low connection with the market and hence a good portfolio diversifier. The reduced asset base facilitates nimble us of micro-caps and small caps.
The team managing the fund has a tendency of avoiding high risks. This has made it a top performer and even earned it a four star rating by the Morningstar. It lays emphasis on maintaining 70 of its deals with corporations that have market caps bellow 600 million. Arbitrage of merger is a strategy that ensures low volatility. It is a strategy that is designed to deliver good returns irrespective of overall quality or the fixed income market performance. It helps to reduce the risks since it is a low volatility bet.
However this fund is not suitable for long-term investment purposes. For long term purposes it becomes as risk as fixed income investments. The fund returns good gains when the equity market goes up the prevalence of low volatility as they reduce. In the past five years, this fund raised returns up to 4.76 and 4.94 yearly for the last three years.
PROTFOLIO
The customer will be advised to invest in a portfolio which is favorable to his income. The portfolio must be a good diversification where risk will be reduced then stocks will be selected which include,
Why diversification reduces portfolio risk as measured by the portfolio standard deviation is important and worth exploring in some detail. The key concept is correlation, which is the extent to which the returns on two assets move together. If the returns on two assets tend to move up and down together, we say they are positively correlated. If they tend to move in opposite directions, we say they are uncorrelated.
The correlation coefficient, which we use to measure correlation, ranges from -1 to 1, and we will denote the correlation between the returns on two assets, say A and B, as Corr(RA,RB). The Greek letter p(rho) is often used to designate correlation as well. A correlation of 1 indicates that the two assets have a perfect positive correlation.
A zero correlation means that the two assets are uncorrelated. If we know that one asset is up, then we have no idea what the other one is likely to do there simply is no relation between them. Perfect negative correlation Corr(RA,RB) -1 indicates that they always move in opposite directions.
CLIENT
The client is asking me, the financial agent, to build an income portfolio, which will allow her to have a lump sum at the end of the two years. The client is young and currently employed. The client saved 100,000 to purchase a house. The client is very concerned about the fluctuations in the economy and would like to protect her investment. She would like to see tangible improvements in her investment. The goal of my client is to use the investment as a down payment on a home within two years. My client also wishes to retain the investment as fore these two years with a flexible-weightings approach which will allow the agent, to periodically adjust the weights of the assets.
OUR STRATEGY
As the clients agent I have proposed to invest in mutual fund, stocks and bonds on this investment. The first basket contains five high yield accumulative preferred stocks. The second basket contains ten high yield common stocks. Upon comparison between the seven preferred stocks, I have chosen the highest rated, five. In addition, I also compared 17 different common stocks and then chose the highest rated ten stocks. In order to make an accurate comparison, as the agent, I divided the date into four categories. The first category compared the daily-expected return with the standard deviation that was taking form the past five years. The second category compared the current ratio, the DE, and the EPS. The third category compared each of the companys NPM and the ROI, along with the asset turnover. The last category is the correlation analysis and comparisons of the stocks. In all the statistics, I assumed that the client would like to reinvests the current income by the same structure.
SCENARIOS
After choosing the stocks, submitted three scenarios to my client. The first scenario consists of 90 common stocks and 10 of preferred stocks. The second scenario consists of 80 common stocks and 20 of preferred stocks. The third scenario consists of 50 common stocks and 50 preferred stocks.
The graph shows the three scenarios, expected returns, and their standard deviations. As the figure above shows, when the expected return increases, the risk also increases. In order to pick the scenario that best suits the client, I, acting as the agent, compared each of the scenario by using standard performance measures by considering the two years treasury note as the risk free rate.
I invested a total of 100 000 in various mutual funds FTSE NAREIT INDUSTRIALOffice Capped Index Fund (FIO), SP Global Technology Sector Index Fund (IXN) and Russell 2000 Growth Index Fund. My choice of these funds was based on their outstanding performance. According to IShares.com the performance of these mutual funds has always been on the upward trend in the past years and their potential to grow can not be over emphasized.
FTSE NAREIT IndustrialOffice Capped Index Fund (FIO) looks for investment results that are in accordance to yield performance and price prior to expense and fees of FTSE NAREIT IndustrialOffice Capped Index.
SP Global Technology Sector Index Fund (IXN) looks for investment outputs that match up with yield performance and price, prior to expenses and fees, of corporations that standard and poors considers to be part of information technology facet of the economy and significant to world market. This consideration depends on the representation of the Standard Poors Global Information Technology Sector Index. The index is part of Standard Poors Global 1200 Index.
On the other hand, Russell 2000 Growth Index Fund looks for investment results that are in accordance to yield performance and cost prior to expenses and fees that small capitalization growth sector of the United States of Americas equity market as characterized by Russell 2000 Growth index. This index represents about 50 of the Russell 2000 index (IShares.com).
Once I had completed the performance analyses, I present mu client with scenario one as being the best financial option with which to meet her financial goals. Scenario one has higher excess return in Jensen Alpha graph. Although this scenario performs the poorest with the Sharpe and Treynor ratios, it has an expected daily return of 0.056 and its standard deviation is 0.01063. Lastly, scenario one has a beta of 0.733.
ALTERNATIVES BENCHMARKS
Due to the type of this investment, the NYSE composite index has a benchmark for the portfolio since it contains both preferred and common stocks. Also, since the portfolio is an income portfolio, the best alternatives are bonds. I will advise my client to use the HCA Inc bond as her best alternative. The graph below shows the yield for the portfolio, the benchmark, and the alternative.
As shown above, the portfolio has higher expected return than the benchmark and the alternative investment.
PREFFERRED STOCK BASKET
As the clients agent and after full analysis, I respectfully choose the following preferred stock
- Empire district lactic company is an operating public utility engaged in the generation, purchase, transmission, distribution and sale of electricity in parts of Missouri, Kansas, Oklahoma and Arkansas. It operates on the electricity utilities industry. After looking for the historical daily return, we can find that the company has an average daily return of .000350 and standard deviation of .011. For the last year, it had a DE of 1.42 and its current ratio is 0.68 looking to its profitability, it had a NPM over the last 5years of 7.71 and it had an EPS of 1.17 for the last year. Also, it had ROI of 2.82 over the past five years.
- DTE energy company is engaged in energy business. This company operates in the electrical utilities industry. After looking for the historical daily return, we can find that the company has a average daily return of .00013 and standard deviation of .0088. For the last year, it had a DE of 1.52 and its current ratio is 1.10. Looking to its profitability, it had an NPM over the last 5 years it had an EPS of 3.23 for the last year, it had ROI of 2.39 over the past 5 years.
- Alcoa Inc is engage in the production and management of primary aluminum, fabricated aluminum, and alumina combined. After looking for the historical daily return, we can find that the company has an average daily return of .000110 and standard deviation of 0.013. For the last year, it had an NPM over the last 5 years of 7.07 and it is 1.12. Looking to its profitability, it had a EPS of 0.28 for the last year. Also, it had a ROI of 7.00 over the past 5years.
- American financial croup, Inc is a holding company that, through subsidiaries, is engaged primarily in property and casualty insurance. After reviewing the historical daily return, we can find that the company has an average daily return of .000582 and standard deviation of 0.013. for the last year, it had a DE of 0.41. Looking to its profitability, it had a NPM over the last 5 years of 8.17 and it had a PS of 1.68 for the last year.
- Delphi financial croup, Inc is a holding whose subsidiaries provide integrated employee benefit services. It operates in the life insurance industry. After looking at the historical daily return, we find that the company has an average daily return of .000371 and standard deviation of 0.017. for the last year, it had a DE of 0.71. Looking to its profitability, it had a NPM over the last 5 years of 8.89 and it had an EPS of o.75 for the last year.
COMPARING PREFERRED STOCKS STRATEGY
To successfully achieve in investing in socks best market prediction abilities must be put into use. However choosing the best stock is not essay (E-trade.com). To be successful I will use fundamental stocks analysis and stock market trend technical analysis as my strategic pillars to strategies and invest the 10,000 stocks. Fundamental stocks analysis is based on returns on assets, priceEarnings ration, return on equity, PEG ratio, and earning per share. I will depend on this metrics because they pinpoint the features of best stocks before making huge short term gains. I will aim at making the most out of the stork on short term basis and therefore will keenly observe the trends of stocks. I will avoid holding on stocks for long as I will always offload then once their prices promise a certain percent of profit on my initial investment. Also I will always dispose stocks whenever their prices show an indication of declining and by them back once the prices have declined or stabilized bellow the original price.
Earnings per share are the ratio of the named companies to the number of its outstanding stocks or rather the number of stocks in possession of its stockholders. This ration indicates the companies profitability. Its values should not be less that 80 and if a company has maintained this accompanies with good growth fro the last ten years, it is likely to continue doing so for the next five years.
PriceEarnings ration- PE ratio is the companys ration of its share price to each shares earnings. This parameter measures total amount investors are ready to pay for every dollar earned. Te best stocks to invest ones money in are those that have a higher PE in comparison to the industries, or markets average.
PriceEarnings to growth ratio PEG ration is also very important. It is the PE divided by the projected year to year growth in earning and it indicates the price of the stock. Its value however should be less than one.
Return on equity on the other hand the return on the shareholders investment calculated for twelve months and it indicates how profitable a company is. The recommended value for return on equity should not be less than 15. However, ROE can be very misleading and can end up overweighting a portfolio with high debt stocks if it applied without putting the other factors in consideration.
Return on assets (ROA) is the total net income divided by the companies total assets. This value indicates the profitability of a company in relation to its assets. The recommended value for ROA is 20 or higher however investors are always advised to keep of companies whose ROA is bellow 5.
These parameters will be my guidelines while investing and trading in stocks. The will guide me as a monitor my stock and determine which one to offload and the new stocks to acquired from the market.
Final portfolio
I will also invest a total sum of 100, 000 from the imaginary fund in bonds. I bought Arbitrage R ABRFX fund bonds at a maximum limit of 100, 0000. This fund looks out to profit from acquisitions and mergers (Morningstar.com). It purchases acquired company stocks and shorts the acquisitor.m as a result the fund gains by the benefit of the spread,. It has a tiny asset base and this has made it to focus on small or micro-capital. Arbitrage fund was more appalling due to lower expense ration (Halpern).
The expenses have been cut although they may be reduced further. This could however pose a risk to the fund due to tax inefficiency and persistent costly brokerage commissions. Failure of merger has can lead to shrinkage of returns. Also the world mergers and acquisition worldwide has increased in complexity. The fund has also has low volatility low connection with the market and hence a good portfolio diversifier. The reduced asset base facilitates nimble us of micro-caps and small caps.
The team managing the fund has a tendency of avoiding high risks. This has made it a top performer and even earned it a four star rating by the Morningstar. It lays emphasis on maintaining 70 of its deals with corporations that have market caps bellow 600 million. Arbitrage of merger is a strategy that ensures low volatility. It is a strategy that is designed to deliver good returns irrespective of overall quality or the fixed income market performance. It helps to reduce the risks since it is a low volatility bet.
However this fund is not suitable for long-term investment purposes. For long term purposes it becomes as risk as fixed income investments. The fund returns good gains when the equity market goes up the prevalence of low volatility as they reduce. In the past five years, this fund raised returns up to 4.76 and 4.94 yearly for the last three years.
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