Addis Ababa University

Collage of Business and Economics

Department of Accounting and Finance
MSc in Accounting and Finance

Course Title: Investment Management

Course Code: ACFN 711

Individual Assignment: on; Portfolio construction

Name: Minyichel Baye

ID: GSR(2705/08)

Submitted to Instructor:

Venkati ponnala (PhD)

Submitted date: May, 2016

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Table of Contets Page

1. Introduction and background

1.1 Meaning of Investment ………………………………………………………..……….…3
1.2 Portfolio Investment ………………………………………………………………..….…3
1.2.1 Portfolio Management ………………………………………………………..…….. 4
1.2.2 Need for Portfolio Management ………………………………………………..……4
1.2.3 Types of Portfolio Management ………………………………………………….….4
1.3 The Value of Portfolio Management ………………………………………………….….5
1.4 Asset allocation strategies ………………………………………………………………..8

2. Portfolio construction on: …………………………………………………………….…..…11

3. Stocks market ……………………………………………………………………….…....…..11
4. Bonds market …………………………………………………………………………….…..11
5. money market …………………………………………………………………………. ..…..12
6. Portfolio returns calculation ……………………………………………………….... …..…14
7. Portfolio performance evaluation ………………………..…………………………..….....15
8. Conclusion and Learning’s from the assignment ……………………………………………15
9. References ……………………………………………………………………………....…. 16

1. Introduction and background

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 
1.1 Meaning of Investment

An investment involves the choice by an individual or an organization such as a pension fund,

after some analysis or thought, to place or lend money in a vehicle, instrument or asset, such as
property, commodity, stock, bond, financial derivatives (e.g. futures or options), or the foreign
asset denominated in foreign currency, that has certain level of risk and provides the possibility
of generating returns over a period of time. When an asset is bought or a given amount of money
is invested in the bank, there is anticipation that some return will be received from the
investment in the future.

Investment is the commitment of money or capital to purchase financial instruments or other

assets in order to gain profitable returns in the form of interest, income, or appreciation of the
value of the instrument. Investment is related to saving or deferring consumption.

In finance, investment refers to the purchasing of securities or other financial assets from the
capital market. It also means buying money market or real properties with high market liquidity.
Some examples are gold, silver, real properties, and precious items. Financial investments are in
stocks, bonds, and other types of security investments. Indirect financial investments can also be
done with the help of mediators or third parties, such as pension funds, mutual funds,
commercial banks, and insurance companies.

1.2 Portfolio Investment

A portfolio investment is a hands-off or passive investment of securities in a portfolio. A

portfolio investment is made with the expectation of earning a return on it. This expected return
is directly correlated with the investment's expected risk. Portfolio investment is distinct from
direct investment, which involves taking a sizeable stake in a target company and possibly being
involved with its day-to-day management. A portfolio refers to a collection of investment tools
such as stocks, shares, mutual funds, bonds, cash and so on depending on the investor’s income,
budget and convenient time frame. Following are the two types of Portfolio:

1. Market Portfolio 2. Zero Investment Portfolio

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 1.2.1 Portfolio Management

The art of selecting the right investment policy for the individuals in terms of minimum risk and
maximum return is called as portfolio management. Portfolio management refers to managing an
individual’s investments in the form of bonds, shares, cash, mutual funds etc so that he earns the
maximum profits within the stipulated time frame. Portfolio management refers to managing
money of an individual under the expert guidance of portfolio managers.

1.2.2 Need for Portfolio Management

Portfolio management presents the best investment plan to the individuals as per their income,
budget, age and ability to undertake risks. It minimizes the risks involved in investing and also
increases the chance of making profits. Portfolio managers understand the client’s financial
needs and suggest the best and unique investment policy for them with minimum risks involved.

Portfolio management enables the portfolio managers to provide customized investment

solutions to clients as per their needs and requirements.

1.2.3 Types of Portfolio Management

Portfolio Management is further of the following types:

 Active Portfolio Management: As the name suggests, in an active portfolio management

service, the portfolio managers are actively involved in buying and selling of securities to
ensure maximum profits to individuals.
 Passive Portfolio Management: In a passive portfolio management, the portfolio
manager deals with a fixed portfolio designed to match the current market scenario.
 Discretionary Portfolio management services: In Discretionary portfolio management
services, an individual authorizes a portfolio manager to take care of his financial needs
on his behalf. The individual issues money to the portfolio manager who in turn takes
care of all his investment needs, paper work, documentation, filing and so on. In
discretionary portfolio management, the portfolio manager has full rights to take
decisions on his client’s behalf.

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  Non-Discretionary Portfolio management services: In non discretionary portfolio
management services, the portfolio manager can merely advise the client what is good
and bad for him but the client reserves full right to take his own decisions.

Who is a Portfolio Manager? An individual who understands the client’s financial needs and
designs a suitable investment plan as per his income and risk taking abilities is called a portfolio
manager. A portfolio manager is one who invests on behalf of the client. A portfolio manager
counsels the clients and advises him the best possible investment plan which would guarantee
maximum returns to the individual. A portfolio manager must understand the client’s financial
goals and objectives and offer a tailor made investment solution to him. No two clients can have
the same financial needs.

1.3 The Value of Portfolio Management

Portfolio management is a process to ensure that your organization or department spends its
scarce resources on the work that is of the most value. If you practice portfolio management
throughout your organization, this process helps to ensure that only the most valuable work is
approved and managed across the entire enterprise. If you practice portfolio management at a
departmental level, it will provide the same function at this lower level.

Department leaders that do not understand how their budgets are spent, and who cannot validate
that the work being funded is the most important, will find themselves under greater scrutiny and
second-guessing in the future. Portfolio management can help your department answer some of
the most basic, yet difficult, questions regarding work performed and value provided.

Example: You have a chance to answer simple questions such as the following.

 Are your resources allocated to the most important work?

 Are you allocating the right amount of resources in new business investments versus
keeping the older, mission-critical processes up and running?

 Do you have capacity to do all the work on your plate for the coming year?

 When new work comes up during the year, can you identify the previously approved
work that will no longer be completed?

 When should you stop supporting old stuff and make the investment in new stuff?

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In general, the value of utilizing a portfolio management approach to managing your investments
is as follows:

Improved Resource Allocation. Too often today, low value projects, or projects in trouble,
squeeze scarce resources and do not allow more valuable projects to be executed. One critical
step is for all departments to prioritize their own work. However, that is only part of the process.
True portfolio management on an organization-wide basis requires prioritization of work across
all of the departments. In addition to more effectively allocating labor, non-labor resources can
be managed in the portfolio as well.

This includes equipment, software, outsourced work, etc. Just because you outsource a project,
for instance, and do not use your own labor, does not mean it should not be a part of the
portfolio. The same prioritization process should take place with all of the resources proposed for
the portfolio.

Improved Scrutiny of Work. Everyone has pet projects that they want to get done. In some
departments, managers make funding decisions for their own work and they are not open to
challenge and review. Portfolio management requires work to be approved by all the key
stakeholders. The proposed work is open to more scrutiny since managers know that when work
is approved in one area, it removes funding for potential work in other areas. As stewards of the
department's money, the Executive will now have a responsibility to approve and execute the
work that is absolutely the highest priority and the highest value.

More Openness of the Authorization Process. Utilizing a portfolio management process

removes any clouds of secrecy on how work gets funded. The Business Planning Process allows
everyone to propose work and ensures that people know the process that was followed to
ultimately authorize work.

Less Ambiguity in Work Authorization. The portfolio management planning process provides
criteria for evaluating work more consistently. This makes it easier to compare work on an
apples-to-apples basis and do a better job in ensuring that the authorized work is valuable,
aligned and balanced.

Improved Alignment of the Work. In addition to making sure that only high priority work is
approved, portfolio management also results in the work being aligned. All portfolio

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management decisions are made within the overall context of the department's strategy and
goals.

Improved Balance of Work. In financial portfolio management, you make sure that your
resources are balanced appropriately between various financial instruments such as stocks,
bonds, real estate, etc. Business portfolio management also looks to achieve a proper balance of
work.

Example: When you first evaluate your portfolio of work, you may find that your projects are
focused too heavily on cost cutting, and not enough on increasing revenue. You might also find
that you cannot complete your strategic projects because you are spending too many resources
supporting your old legacy systems. Portfolio management provides the perspective to categorize
where you are spending resources and gives you a way to adjust the balance within the portfolio
as needed.

Changed Focus from Cost to Investment.: You don't focus on the "cost" side of your financial
portfolio although, in fact, all of your assets were acquired at a cost.

Example: You may have purchased XYZ company stock for $10,000. However, when you
discuss your financial portfolio, you don't focus on the $10,000 you do not have anymore. You
invested the money and now have stock in return so you focus on the stock that you now own.
You might also talk about your investment of $10,000 to purchase the stock, but your interest is
in its current value and whether it has generated a positive or negative benefit! Likewise, in your
business portfolio, you are spending money to receive benefits in return. Portfolio management
focuses on the benefit value of the products and services produced rather than just on their cost.

Increased Collaboration: In many organizations, senior managers make business decisions

while only taking into account their own department.

Example: The Marketing Division is making the best decisions for Marketing, and the Finance
Division is making the best decisions for Finance. However, when all the plans are put together,
they do not align into an integrated whole, and, in fact, they are sometimes at odds.

You cannot perform portfolio management within a vacuum. If you practice portfolio
management at the top of your organization, all departments will need to collaborate on an
ongoing basis. 

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Enhanced Communication: This is a similar benefit to increased collaboration. In many
organizations today, functional departments do not communicate well with their peer
departments or even within their own groups. Portfolio management requires an ongoing dialog.
If your portfolio is organization-wide, the heads of the departments will need to communicate
effectively.

This enhanced communication will also be required between the Executive and the portfolio
management team. In addition, there are many more opportunities to communicate the value of
the portfolio. Portfolio metrics should be captured and shared with the rest of the departments. A
portfolio management dashboard should be created and shared. The business value of portfolio
projects should also be measured and shared.

Increased Focus on When to Stop a Project: This is equivalent to selling a part of your
financial portfolio because the investment no longer meets your overall goals. It may no longer
be profitable, or you may need to change your portfolio mix for the purposes of overall balance.
In either case, you need to sell the investment. Likewise, when you are managing a portfolio of
work, you are also managing the underlying portfolio of assets that the work represents. As you
look at your portfolio, you may recognize the need to "sell" assets. While the asset may not
literally be sold, you may decide to retire or eliminate the asset.

1.4 Asset allocation strategies

Establishing an appropriate asset mix is a dynamic process, and it plays a key role in determining
your portfolio's overall risk and return. As such, your portfolio's asset mix should reflect your
goals at any point in time. Here we outline some different strategies of establishing asset
allocations and examine their basic management approaches. Six Asset Allocation Strategies:

A. Strategic Asset Allocation

This method establishes and adheres to a "base policy mix" - a proportional combination of
assets based on expected rates of return for each asset class. For example, if stocks have
historically returned 10% per year and bonds have returned 5% per year, a mix of 50% stocks
and 50% bonds would be expected to return 7.5% per year.

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 B. Constant-Weighting Asset Allocation

Strategic asset allocation generally implies a buy-and-hold strategy, even as the shift in values of
assets causes a drift from the initially established policy mix. For this reason, you may choose to
adopt a constant-weighting approach to asset allocation. With this approach, you continually
rebalance your portfolio. For example, if one asset is declining in value, you would purchase
more of that asset; and if that asset value is increasing, you would sell it.

There are no hard-and-fast rules for timing portfolio rebalancing under strategic or constant-
weighting asset allocation. However, a common rule of thumb is that the portfolio should be
rebalanced to its original mix when any given asset class moves more than 5% from its original
value.

C. Tactical Asset Allocation

Over the long run, a strategic asset allocation strategy may seem relatively rigid. Therefore, you
may find it necessary to occasionally engage in short-term, tactical deviations from the mix to
capitalize on unusual or exceptional investment opportunities. This flexibility adds a market
timing component to the portfolio, allowing you to participate in economic conditions more
favorable for one asset class than for others.

Tactical asset allocation can be described as a moderately active strategy, since the overall
strategic asset mix is returned to when desired short-term profits are achieved. This strategy
demands some discipline, as you must first be able to recognize when short-term opportunities
have run their course, and then rebalance the portfolio to the long-term asset position.

D. Dynamic Asset Allocation

Another active asset allocation strategy is dynamic asset allocation, with which you constantly
adjust the mix of assets as markets rise and fall, and as the economy strengthens and weakens.
With this strategy you sell assets that are declining and purchase assets that are increasing,
making dynamic asset allocation the polar opposite of a constant-weighting strategy. For
example, if the stock market is showing weakness, you sell stocks in anticipation of further

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decreases; and if the market is strong, you purchase stocks in anticipation of continued market
gains.

E. Insured Asset Allocation

With an insured asset allocation strategy, you establish a base portfolio value under which the
portfolio should not be allowed to drop. As long as the portfolio achieves a return above its base,
you exercise active management to try to increase the portfolio value as much as possible. If,
however, the portfolio should ever drop to the base value, you invest in risk-free assets so that
the base value becomes fixed. At such time, you would consult with your advisor on re-
allocating assets, perhaps even changing your investment strategy entirely.

Insured asset allocation may be suitable for risk-averse investors who desire a certain level of
active portfolio management but appreciate the security of establishing a guaranteed floor below
which the portfolio is not allowed to decline. For example, an investor who wishes to establish a
minimum standard of living during retirement might find an insured asset allocation strategy
ideally suited to his or her management goals.

F. Integrated Asset Allocation

With integrated asset allocation, you consider both your economic expectations and your risk in
establishing an asset mix. While all of the above-mentioned strategies take into account
expectations for future market returns, not all of the strategies account for investment risk
tolerance. Integrated asset allocation, on the other hand, includes aspects of all strategies,
accounting not only for expectations but also actual changes in capital markets and your risk
tolerance. Integrated asset allocation is a broader asset allocation strategy, albeit allowing only
either dynamic or constant-weighting allocation. Obviously, an investor would not wish to
implement two strategies that compete with one another.

Asset allocation can be an active process to varying degrees or strictly passive in nature. Whether
an investor chooses a precise asset allocation strategy or a combination of different strategies
depends on that investor's goals, age, market expectations and risk tolerance.

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 /selling priceClosing

investedAmount
Price change

changer% of price

the asset inWeight of

Value at thePortfolio
Ass Asset Name with

PricePurchase

change(HPR)
% of price
Code

Portfolio
Return
et
clas
s
Ameris Bancorp $ 30.72 $ 31.40 $ 0.68 2.21% 55,000.00 8.21% 56,217.45 1,217.45 2.21%
ABCB
2. Alkermes Plc $ 39.58 $ 40.36 $ 0.78 1.97% 25,000.00 3.73% 25,492.67 492.67 1.97%
ALKS
3. Coca Cola Bot Cons COKE $160.80 $164.40 $ 3.60 2.24% 60,000.00 8.96% 61,343.28 1,343.28 2.24%
4. Collegium Pharma Cm COLL
$ 18.58 $ 19.10 $ 0.52 2.80% 150,000.00 22.39% 154,198.06 4,198.06 2.80%
Equity Securities

5. Masimo Corporation $ 42.73 $ 42.80 $ 0.07 0.16% 45,000.00 6.72% 45,073.71 73.71 0.16%
MASI
6. Matthews Intl Corp MAT
$ 50.77 $ 52.57 $ 1.80 3.55% 35,000.00 5.22% 36,240.89 1,240.89 3.55%
W
7. Microvision $ 1.86 $ 2.11 $ 0.25 13.44% 50,000.00 7.46% 56,720.43 6,720.43 13.44%
MVIS
8. National American Un $ 1.88 $ 2.14 $ 0.26 13.83% 150,000.00 22.39% 170,744.00 20,744.00 13.83%
NAUH
9. Navigators Grp Inc $ 82.60 $82.91 $ 0.31 0.38% 50,000.00 7.46% 50,187.65 187.65 0.38%
NAVG
10. Navient Cp Cmn NAVI $ 12.60 $13.65 $ 1.05 8.33% 50,000.00 7.46% 54,166.67 4,166.67 8.33%
Total $670,000 100.00% $710,384.81 $40,384.81 6.03%
1.AAA bonds 6%PA 130,000
Securities orincomeFixed

56.52% 130,325.00 325.00 0.25%

2. AA Bonds 7% 100,000 43.48% 100,291.67 291.67 0.29%
Bonds

Total $230,000 100.00% $230.616.67 $616.67 0.27%

MM Money market 5% 100,000 100.00% 100208.333 208.33 0.21%
S Assets
Total 100,000 100.00% $100208.33 $208.33 0.21%

Grand Total 1000,000 100.00% 1,041,209.82 41,209.82 4.12%

 6. Portfolio returns calculation
 Percentage change in market value over a period of time, after accounting for external
cash flows (contributions and withdrawals)
 If no external cash flows:

MV t −MV t−1
rt =
MV t−1

Where MVt is the market value of the portfolio at the end of period t
Example: t = month

From NASDAQ market indices April 18/2016 = 4,919.36

May 2/2016 = 4,817.59
4,817.59 – 4,919.36
4,919.36
= - 0.0211
 The market is -2.11% of loss over 15 days.
From my portfolios investment (I ) r t = IVt – IVt-1
IVt – Ivt-1
Beginning value =1,000,000
Ending value = 1,041,209.82
1,041,209.82 - 1000000
1,000,000
= 0.0412
 My return is 4.12% over 15 days.
 7. Portfolio performance evaluation
First we have to understand the basic point for evaluation bellow:
 The ability to derive above-average returns conditioned on risk taken, either through
superior market timing or superior security selection.
 The ability to diversify the portfolio and eliminate non-systematic risk, relative to a
benchmark portfolio.
From the above Portfolio returns calculation, I Analyze the performance of my portfolio
comparing with NASDAQ market Index. I conclusion that, investor (I am) is good performance
than NASDAQ market. Because my Portfolio returns is 0.0412 with in fifteen days but
NASDAQ Portfolio returns is -0.0211 within same days.

8. Conclusion and Learning’s from the assignment

Each investor has unique investment objectives that are affected by short- and long-term needs
and requirements. This fact sheet will help me with my financial to determine how to best meet
financial goals. Investors’ tolerance for risk is a very personal characteristic that may be difficult
to determine and may change over time. my emotional make-up plays a role in my willingness
to take risk. But my objective ability to bear risk, High-income investors may be more willing to
choose riskier strategies because they can more easily contribute additional investment capital
should they sustain losses. If you must rely on your portfolio to meet income needs, you may be
limited in the size of positions you can take in illiquid, non- income-producing investments.
Then new investments may emphasize diversification. The time horizon is vital in setting
investment objectives. Investors designs and manages the portfolio for an investor after formally
documenting the investment policy statement. The job starts from the moment the investor
articulates his objectives and constraints. The more diligence is paid while formalizing objective
and constraints, the better is portfolio out come to the needs of the investor.
 9. References:

Text Book:

Essentials of Investments, Ninth Edition

Useful Websites

 http://www.investopedia.com/terms/p/portfolio-investment.asp#ixzz49ONBCXdw
 http://www.investopedia.com
 http://www.businessdictionary.com/definition/investment-portfolio.htm

 http://www.citeman.com/5072-specification-of-investment-objectives-and-
constraints.html

 http://financial-education.com/2008/01/29/investment-constraints/
 NSASDAQ stock market .com