- Providing an Investment Recommendation - A.P. Investments is a Wealth Manageme
ID: 2698614 • Letter: #
Question
- Providing an Investment Recommendation -
A.P. Investments is a Wealth Management firm that assists customers in making investment decisions. You have recently been hired as a trainee at A.P. Investments and have been put in a team with some other trainees. As your boss wishes to waste no time he immediately has a task for you.
Mr Thompsen, a client of A.P. Investments has recently approached your boss for investment advice. Mr Thompsen recently inherited $2 million and wishes to invest this money for the next two years. Mr Thompsen has heard about the great potentials from investing in stocks, but is completely unfamiliar with stocks and the stock market in general.
Your boss has asked you and your team to help Mr Thompsen in his investment decision and has instructed you to write a report providing an investment recommendation for Mr Thompsen. In your talks to Mr Thompsen, you have learned that he wishes to keep his investments simple and manageable (i.e. he wishes to establish a passive investment portfolio that would give him the most return for the amount of risk he is taking). He has also mentioned that he is more concerned with losing a lot than with making a lot of money (which your boss has translated into a risk figure (standard deviation) of max. 12% p.a. on his portfolio that may include risky assets like stock shares and risk-free assets like T-bills).
Your boss has asked you to write a 5-page report for Mr Thompsen, providing him with a detailed analysis and a clear recommendation. Your boss warns you that Mr Thompsen has little financial knowledge and will not understand terms like standard deviation, beta, Rsquared, etc. You will therefore need to explain any financial jargon to Mr Thompsen. He further warns you that the report should be well presented and free of any typo’s or grammatical errors, as you lose all credibility as an advisor if there are any mistakes in the report. In addition, your boss notes that graphs often help in your explanations.
For the analysis part your boss gives you the following instructions:
The report should include:
The assessment measures your ability to:
1. Collect relevant data, effectively present the data, critically analyse the data, and correctly interpret the data.
2. Demonstrate a thorough understanding of relevant investment theories and practices.
3. Write a report free of grammatical mistakes or typing errors.
4. Conduct effective teamwork with other group members.
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1 Data of historical stock prices can be obtained from websites such as yahoo finance website and the NZX website, while data of risk-free rates can be obtained from the RBNZ website.
2 You need to calculate the beta and standard deviation of returns as well as estimate the expected return for each of the five selected stocks based on the weekly historical data
3 It is assumed that short-selling is allowed. Furthermore, the Solver tool in Excel is great for solving these kind of problems
4 Again use the Solver tool.
5 Again use the Solver tool.
Explanation / Answer
Data collection is the systematic recording of information; data analysis involves working to uncover patterns and trends in data sets; data interpretation involves explaining those patterns and trends. Scientists interpret data based on their background knowledge and experience, thus different scientists can interpret the same data in different ways. By publishing their data and the techniques they used to analyze and interpret that data, scientists give the community the opportunity to both review the data and use it in future research. Before you decide what to wear in the morning, you collect a variety of data: the season of the year, what the forecast says the weather is going to be like, which clothes are clean and which are dirty, and what you will be doing during the day. You then analyze that data. Perhaps you think,
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