Investment Portfolio Harvard Case Solution & Analysis

Eligible Asset Classes and Their Target Weights:

Following are the eligible asset classes we have chosen to invest in according to our return objectives stated above, risk tolerance and stated constraints and their respective target weightage:

SecuritiesAllocation
Mutual Funds

5.0%

Commodities

5.0%

Real Estate

10.0%

Asset backed securities

10.0%

U.S. Treasury bills (short term)

10.0%

BONDS (BD)

15.0%

LARGE CAP VALUE (LV)

15.0%

LARGE CAP GROWTH (LG)

15.0%

SMALL/MID/SPECIALTY (SM)

10.0%

GLOBAL/INTERNATIONAL (GL)

5.0%

100.0%

Investment in mutual funds helps in diversifying the exposure of loss in the capital amount, that’s why mutual funds have been selected to manage the risk since it generates a good return against the comparatively low risk.

Investment in commodities provides a high return and a value added feature of diversification and this investment is a good tool against the inflation risk as it also acts as inflation hedger to the investor.

Investment in real estate provides diversification benefits to the investor; it is also a yield enhancer. It is also known as the inflation hedger as normally the yield from the real estate is in the form of rents and generally rent agreements are supposed to have and inflation factor.

Investment in high rated Asset Based Securities offers high yields and diversification benefit to its investor, On the basis of that, we have selected ABS for investment.

Investment in the U.S. Treasury Bonds is the most beneficial for investors like us who are more concerned about the while also focusing on lower risk over the capital amount.

Investment in bonds is also known as a fixed income investment, since it is slow but steady and guaranteed return investment vehicle. It also diversifies the risk of the investor.

Sometimes dividend accounts for half the return from the investment. Dividends are very important for any public company as it shows the progress of the company and large companies are keen to reward its shareholders and to increase its shareholder wealth.

In the short run, the investment in the Large Cap Value Stocks may be a risky choice against the healthy return, hence, a good option for some high return in less time.

Sometimes small business can outperform the larger businesses, therefore, creating a good return for the investor as well as higher risk. This is another good option for quick money.

Investment in foreign companies and in their bonds is beneficial in many ways, i.e. the tax differences among the countries offered a tax reduction over the returns. Asset protection is yet another benefit offered by the offshore investment.

PART “C”: DEMONSTRATE THE PORTFOLIO’S SUITABILITY

Portfolio Meeting Return Objectives:

Based on the above strategies, objectives and constraints, our portfolio, to best of our knowledge and beliefs, is optimal as it accounts for each and every objective of our investment policy and requirements. As stated in Part A of this case study, as an investor, we would like to have at least around $20,000 as a return from our portfolio. As shown above in the allocation table, the return from all securities and asset classes are adequate. For example, if we invest in the Mutual Funds, that will generate expected return of around 0.510% and if we talk about investing in commodities and real estate, then we will have a good return over invested and allocated money. Similarly, investment in the U.S. Government securities and bonds provides fixed and guaranteed return with lower risk as compared to other securities; meanwhile, it offers a diversification benefit for the investor. From the investors’ point of view, the return must have an adequate amount so that he/she can meet his/her future expenses. The following may be the return objectives of the investor: capital preservation, capital appreciation, current income and total return. All above values and expected returns are assumed by using logical assumptions and judgments. As shown in the appendices, the yield we will be getting from our different allocation of capital is just around our target return of $20,000. From the entire above allocation model, other than the 6 securities given in the case, other 4 security’s yields are assumed using logical assumptions and nature of the investment.

Portfolio Meeting Risk Objectives:

Based on the above strategies, our risk tolerance and constraints, to best of our knowledge and beliefs, can be diversified as we have chosen some very low risk bearing securities like U.S. Government Treasury Bills and Bonds, which guarantees fixed return and on the other hand, some of the securities bear comparatively high risk factor and, thus, provides high return. So the low risk security sets off the high risk, hence, it provides diversification effect to the investor..................................

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