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Focus on the Individual Investor - Coursework Example

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"Focus on the Individual Investor" paper contains a presentation that was made with the purpose of determining an appropriate portfolio for a retiree Investor of advanced age and needs typical of that age. The portfolio proposed includes some money in cash (5% to 10% of the portfolio). …
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Focus on the Individual Investor
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Download file to see previous pages While the simpler personal portfolio does not demand the rigor and complexity devoted to institutional investments, its mismanagement will nevertheless have severe repercussions were one considers the welfare of the portfolio’s beneficiaries.

This treatment will thus be on the recommendations for an individual investor. The selected subject is a retired widower, 70 years of age, and with no dependents relying on him for support. The subject receives a small pension from his previous employer and his entitled pension from the state. He has no debts nor mortgage. Finally, he has £80,000 to invest in.

The analysis will be conducted along the lines of the Modern Portfolio Theory as applied to individual investors. According to Bodie et al (1996, p. 3-4) the main organizing principle of the MPT is what is termed efficient diversification. “The basic idea is that any investor who is averse to risk, that is, who requires a higher expected return in order to increase exposure to risk, will be made better off by reorganizing the portfolio so as to increase its expected return without taking on additional risk.” (Bodie et al 1996, p. 3). The issue prevailing inefficient diversification is asset allocation, or the choice of how much is to be invested in broad asset classes defined by peculiar qualifying characteristics, in order that the best possible portfolio is achieved to meet the investors’ meet the investors’ goals within the limits of his constraints.

Significant parameters that would determine portfolio restrictions are grounded in the practical decisions the investor is to make. First is the determination of whether the resort to passive or active management. The former – passive management – is the strategy of maintaining a well-diversified portfolio of generic security types in order to attain average market returns. In such a case, no attempt is made to outperform the market through the use of analysis and forecasting. ...Download file to see next pagesRead More
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