Investment Strategy and Interactive Investor - Assignment Example

Investment Strategy and Interactive Investor Abstract This report is about to the 100,000£ inherited for the purpose of the investment in different sectors to get the high level of return or profit. As compared to the entire source where we can invest me only chose the stock market for investment purpose because it is highly liquid as compared to the property, land and other tangible assets. In the report justify the portfolio, investment strategy and other topics like taxation, dividend if any elaborate it. According to Portfolio theory, to generate high profit you have to take risks, more the risk more chances of profit. INTRODUCTION Strategic investment is a term which is related to the strategy of a company, an individual or a group of a person to generate profits through investments. Investment either long term or short term. Investments are done by people to generate the profit or maximum return from them but if a person wants to increase the return on investment then he has to take the high level of risk, because risk and return on investment are associated with each other. Portfolio is a theory which also explains the concept that to get the highest return higher risk taking is necessary and when a person take high risk then the possibility to achieve high return becomes high (Investopedia.com 2012b) INVESTMENT STRATEGY PORTFOLIO 1- JUSTIFICATION OF STRATIGY Basic Justification Ordinary shares are most profitable and reliable source in the market and for investment purpose people prefer to purchase an ordinary share of a company, because through this person get voting right to vote in a general meeting of the company as well as company pay dividend to ordinary shareholders twice in a year. Ordinary shareholders are permitted to receive dividends if available after the payment of dividends on preferred shares. Ordinary shareholders are considered unsecured creditors. They are also known as "common stock" (Investopedia.com 2012a) Due to the rapid fluctuation in the stock market give a chance to a shareholder to posses the share for short periods and get profit on their sale and there is no need to wait for a long time. Gold, land & property and tangible assets as compared to the ordinary shares are not easily convertible into money or not have as much liquidity, a person have to wait for a long period of time to get profit which desired or after this there is no surety that you will get the profit because of the market fluctuation. If you want to possess an investment for a long period of time then you can own shares for more than one or up to five years (Nasdaq.com 2012) Concentration of Portfolio Theory An investor always wants to get the highest return from the investment with the less risk level. But, according to The Portfolio theory if any investor wants a high return on investment then he must take high risk. Through diversification we can cope up the risk up to a certain level. Either of investing in one company its favorable to invest in different companies, this can help if a person face loss in one investment then is can be cooped up with other investment’s profit. In this scenario we have to define tow term “Risk” and “Return on Investment” (Hubbard 2007). Return on Investment Return on Investment is the expected amount of return which an investor expects that come from his investment, nor the return from investment can get with high rate of risk. Risk Risk is the possibility of losing something from the actual investment. Types of Risk Systematic Risk Unsystematic Risk Systematic risk The risk which cannot be controlled and not affected through diversification Unsystematic Risk The risk which can be controlled and affected through diversification. Calculation of Portfolio Risk For the investment we purchase 1,000 shares of Standard Charter on 5th Nov 2012 at the rate of 145p NS within 20 days its rate get down by 25p and the price of per share is becoming 120p, in which result we have to bear a great loss. Instead of that by using diversification we invest in a number of different companies though purchase their shares then we can coop up our loss from other sources (Kalyan-city.blogspot.com 2012). Consideration of Efficient Market Hypothesis An investment theory state that, it is not possible to compete the stock market because share price always affected by the all stock exchange information. The shares are purchased and sale on only the price that offer by the stock market with its continues fluctuation a person cannot set the price of shares on its own desire like purchase the shares at the lowest price and sale at the price which is most desirable and there only one way through an investor can get the highest return is that chose the investment with high risk (Bhalla 2010). 2- PORTFOLIO PERFORMANCE Basic calculation Income Tax Computation Non Savings Dividends Total Tax Savings Deducted • Employment income 35000 35000 • Savings income 0 0 • Dividends 0 0 . Net Income 35000 0 0 35000 • Less: Personal Allowance (X) (8465) (8465) 26535 26535 Tax Band Non-Savings 26535 x 20% = 5307 Savings 0 x 40% 0 Dividends 0 x 32.50% 0 Tax Liability 5307 Tax Paid 0 Income Tax Payable 5307 Tax Consideration and Calculation When an investor going to do investment firstly he has to examine the tax criteria. Investment income taxable as other area but, the tax rate is different in different areas. As on dividend the low tax charged as compared to the interest rate. Stock market investment is the best way to generate the tax free income. Normally the two types of stamp duties are payable on the shares transaction (HM Revenue and Customs n.d.). Stamp Duty Reserve Tax Stamp Duty Stamp Duty Reserve Tax Stamp duty reserve tax is payable at the time of share transaction and its regulation become more rapid in the increase of online dealings. Stamp Duty It is paid when the deal done through physical document and if the amount of transaction is 1,000£ or less, then stamp duty will not charge. Broker Fee Broker fee is a specific payment which is charged by a person or a company who acting as an agent and through which we can purchase shares from the stock market. This fee is charged as a result of sale, purchase, delivery or any advice and other transactions (Thisismoney.co.uk 2011). Comparative Analysis 1- Jensen Index Jensen Index is that index which helps to measure the performance of our investment by coming across to the risk of the portfolio. The Jensen index uses the CAPM as its base of determination, if we have outperformed a market index. The Positive Jensen demonstrates that we have performed outside the market line and Negative Jensen gives you an idea about that we are under-performed. For examples, on the whole Portfolio we had a high Positive Jensen of 89.67, and a high Jensen index proposes a level of return which is far above the ground given by the level of risk ( systematic or market) on the investment. A negative Jensen index designates mediocre performance when compare to the risk. The major problem here is that on the whole portfolio’s performance of our Jensen is High Positive Jensen Index. Jensen index is also known as Jensen Alpha or Jensen Measure (Thisismoney.co.uk 2011). “The formula for the Jensen index is as follows: Jp = Rp - [Rf + (Rm - Rf) p]” Jensen's measure is the one of the ways that helps in the establishment of analysis, whether a portfolio is earning the appropriate return for its level of risk or not. If the value is high or positive, then the portfolio is earning excess returns and a positive value for Jensen's alpha is be a sign of that we have "beat the market" with our stock selection skills (Pareto 2008). 2- Treynor Index The Treynor index is that risk adjusted measure of the performance that conform the risk quality of a portfolio to portfolio’s systematic risk or beta measurement. The Treynor index is used to measure up the market and other portfolios to settle for better-quality of presentation. For examples, if the portfolio performance of our investments shows that we have a Higher Treynor value of 43.37, that means we had an improved performance of our portfolio of Treynor index. The positive or negative return on the market constantly has a big impact on the progress of investment shares (Chandra and Shadel 2007) The Treynor’s index is determined as follows: Tp = Rp – Rf βp The importance of Treynor performance measures does not account for the effect of active portfolio management. It is simply measuring the actual returns and it is known as the return to instability ratio. This index is named after Jack Treynor (Pareto 2008). 3- Sharpe Index This ratio is developed by Nobel laureate William F. Sharpe as a risk adjusted measure of return which is used to calculate the standard deviation and excess return to find out the performance of a portfolio. The high Sharpe ratio indicates the better performance of our risk adjusted performance (News.morningstar.com 2010). The Sharpe ratio formula is: Sp = Rp – Rf βp The Sharpe ratio is so simple, which gives to its recognition. It is conked out into just three components: asset return, risk-free return and standard deviation of return. 3- PORTFOLIO EVALUATION The evaluation of our portfolio for the complete investment period that we have invested in for the purpose of generating profit in the stock market. The results will be taken by the help of the following tools that is required to evaluate our performance of the market portfolio (Chandra and Shadel 2007). The Beta Beta point towards that how sensitive a security’s returns are to the returns on the market portfolio. Beta of 1.0 returns has a tendency to track the market portfolio, whereby if the market portfolio decreases or increases by 10%, the stock has a tendency to move up or down by 10%.Beta of less than 1.0, have a tendency to rise or fall more than the market. Standard Deviation The illumination of the standard deviation of portfolio is the same as the understanding of the standard deviation for an individual security. The more we broaden apart our securities, the higher the variance. Standard deviation is known as historical unpredictability and is used by investors as a measure for the amount of expected instability. Standard Deviation gives us a better picture of our securities than just the mean only. But the difficulty of standard deviation is that it doesn’t enlighten the full range of the securities. Profit At the date of 5th November 2012, the amount of 100,000£ inherited to us for the purpose of investment to generate profit. Through all surveys we decided to invest money in the stock market. We decide to move with the flow of the market because if we want to make high profit we have to take risks (News.morningstar.com 2010). CONCLUISON We have 100,000£ inherited for the purpose to generate the profits by doing the investments. For the purpose of investment you have to make strategies that how to do investment? Where to do? What to do? And why to do? When you got the answer of these questions then our track you got your track. In this report we make a strategy that in which sector we have to invest, like either in gold, property, land, currency, tangible assets or intangible assets then we realize that there are many sectors in which we can invest but the objective is not just to invest it’s that you have to generate profits too. So, by doing all the comparative study finally we decided to purchase the shares of companies because they are highly liquid and easily convertible into money. In the stock market trends are not same as every time it changes with every tickle of the watch. Because of this condition no one can predict about it. So, to earn the profit it is necessary for a person to be flowing with the flow of the market. To refrain from loss and attain profits a person must chose diversity and not to put his all eggs in a same basket. The report concludes that to maximize the profit its necessary for a person to adopt the portfolio theory. Bibliography Bhalla, V. K (2010). Investment Management. New Delhi: S. Chand & Co. Ltd.  Chandra, S. and Shadel, W. G (2007). "Crossing disciplinary boundaries: Applying financial portfolio theory to model the organization of the self-concept". Journal of Research in Personality 41 (2): 346–373. HM Revenue and Customs (n.d.). Stamp Duty Reserve Tax - the basics. [online] Available at: http://www.hmrc.gov.uk/sdrt/intro/basics.htm. [Accessed 6 November 2012]. Hubbard, Douglas (2007). How to Measure Anything: Finding the Value of Intangibles in Business. Hoboken, NJ: John Wiley & Sons. Interactive Investor (2012). Home. [online] Available at: http://www.iii.co.uk/ [Accessed: 6 November 2012]. Top of Form Bottom of Form Investopedia.com (2012a). Ordinary Shares Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/o/ordinaryshares.asp#axzz2BNHiAg00 [Accessed: 6 Nov 2012]. Top of Form Investopedia.com (2012b). Efficient Market Hypothesis (EMH) Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp#axzz2BNHiAg00 [Accessed: 5 Nov 2012]. Top of Form Pareto, C (2008). Measure Your Portfolio's Performance. [online] Available at: http://www.investopedia.com/articles/08/performance-measure.asp#axzz2BNHiAg00 [Accessed: 5 Nov 2012]. Top of Form Kalyan-city.blogspot.com (2012). Types of Risk Systematic and Unsystematic Risk in Finance. [online] Available at: http://kalyan-city.blogspot.com/2012/01/types-of-risk-systematic-and.html [Accessed: 6 Nov 2012]. Top of Form Nasdaq.com (2012). Introducing Risk Grades. [online] Available at: http://www.nasdaq.com/investing/risk/introducing-riskgrades.aspx [Accessed: 5 Nov 2012]. Top of Form News.morningstar.com (2010). Calculating Your Personal Rate of Return. [online] Available at: http://news.morningstar.com/classroom2/course.asp?docid=3228&page=1 [Accessed: 6 Nov 2012]. Top of Form Thisismoney.co.uk (2011). This is Money: Be your own financial adviser - predictions, advice & tips. [online] Available at: http://www.thisismoney.co.uk/money/index.html [Accessed: 6 Nov 2012]. Read More