Investment Criteria Bonds Only those rated as investment grade. The portfolio ma
ID: 2759989 • Letter: I
Question
Investment Criteria
Bonds
Only those rated as investment grade. The portfolio market value invested in fixed income securities shall not exceed 35 percent of the total portfolio, and no more than 15 percent in any single issuer. You may select ETF or mutual funds that primarily hold bonds rather than select individual bonds.
Common Stocks
All exchange listed and NASDAQ common stocks can be included in the portfolio, with a maximum of no more than 15 percent of the portfolio market value in any single company. No more than 80 percent of the total portfolio may be allocated to equity securities (common stocks and equity index mutual funds).
Index Funds
The use of equity index fund(s) shall be allowed. When deemed prudent, up to 80 percent of the fund can be invested in an equity index, with the remaining 20 percent invested in highly liquid securities (i.e., money market and CD’s).
Foreign Securities
Only foreign common stocks available for purchase on U.S. exchanges are permitted. No more than 20 percent of the equity portion of the portfolio may be in foreign securities.
Derivatives
Investing in derivatives (options, futures, etc.) is not permitted.
Margin and Short-Selling
Margin purchase and/or short-selling is not permitted.
Fees and costs
For ETF and mutual funds, all holdings must be from Schwab One Source Select List. You must further only choose a holding with an annual maintenance fee not to exceed 0.15 percent for an ETF and 0.50 for mutual funds.
Diversification
You are to diversify the holdings in the portfolio to reduce risk through less correlation. This would mean that stocks should be held within different industries, sizes, sectors, value or growth, etc. You should seek to include other asset classes in the portfolio to achieve an intra-portfolio correlation of no more than 0.70.
Assignment
ANSWER EACH QUESTION BELOW. SOME QUESTIONS HAVE MORE THAN ONE PART.
INVESTING IN BONDS. All equity portfolio now, with a level of cash reserves. With interest rates low, why should we be cautious about investing in bonds? Your answer should include some or all of the following in detail:
Relationship between bond prices and interest rates
Differences in bond maturity
Probable direction of interest rates
If you decide not to include bonds in this portfolio, what could be an acceptable substitute to offer diversification in a manner consistent with the investment criteria? Explain and offer examples.
ANALYST OPINION OF CURRENT PORTFOLIO. Analyze each of the stocks above currently in the portfolio. Go to Google Finance or Yahoo Finance and review analyst recommendation. You will need to prepare a recommendation about the stock and whether we should sell, buy more, or hold the position. Note the consensus of the analysts for each stock and explain this analysis (strengths and weaknesses of the company). On finance.yahoo.com go to Analyst Coverage and the Analyst Opinion. Do you agree with opinion of analyst? Why or why not?
WHICH PORTFOLIO POSITION(S) TO SELL. You are tasked with selecting one or more of the five stocks to sell and explain why. Your explanation will reflect your response in question #2 but will also reflect some or all of the following:
Portfolio composition as it relates to asset allocation and risk overall. Use http://www.investspy.com/ to consider portfolio correlation and select a portfolio with less correlation in an attempt to reduce diversifiable or unsystematic risk.
Economic cycle
Beta. On finance.yahoo.com go to Company and Key Statistics
Competitors (Company…Competitors)
Industry diversification of portfolio
NEW SECURITIES FOR PORTFOLIO. Which securities would you choose for a new portfolio? Your selection can be to replace some or all of the existing holdings but must replace at least one stock. The following indexes are acceptable for your equity selection(s): Dow 30, S&P 500, and FTSE 100. Your selection does not have to be an individual stock. Refer back to criteria on pages 2 and 3 when making your portfolio selections.
How does your selection strengthen the portfolio? (correlation and diversification, risk, asset allocation, etc.)
What is the beta if a stock is chosen? In words, how will this affect the portfolio?
What do analysts say about stock, bond, or mutual fund strengths and weaknesses?
How are you considering systematic (non-diversifiable measured by beta) and unsystematic (diversifiable) risk? Explain what each is and how each can be reduced.
Is dividend yield or capital gain yield a consideration? Why
Per our investment guidelines, no more than 80 percent of the portfolio may be invested in equities. Of the total funds available in the portfolio does your selection meet the criteria? What is the approximate equity percentage of new portfolio based on the price of securities today? For the new proposed portfolio list the following: ticker symbol of each security or fund; number of shares to hold; purchase price (i.e. limit order)
Dividends were recently set to automatically reinvest. Should we reinvest? Why?
Use http://portfolio.morningstar.com/Rtport/Free/InstantXRayDEntry.aspx to access Morningstar X-Ray. From this link you need to evaluate the existing portfolio and compare to the new portfolio that you recommended. Consider each of the areas to follow and summarize in a table where you argue that the proposed portfolio is “better”. (Note: only include individual stocks, ETFs, stock or bond mutual funds)
Asset allocation
Stock style diversification
Stock sector and type in relation to S&P 500
Explanation / Answer
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