Capital Markets Portfolio and Investment Opportunities - Assignment Example

Unit Investment portfolio Introduction Choosing the stocks to buy or invest in is a critical process that requires sensibility and good judgment. Van Knapp (2006) suggests a more rigorous approach that lists out the best practice activities in designing an investment portfolio. It should be noted that the basic goal of investment is to make profit in the end. Kwan and Parlar (2002) suggests that if the investor wishes to get returns on their money and therefore a careful plan should be used in designing the portfolio so as to reduce the possibility of suffering losses on investment. An incisive review of the market is necessary to determine the liquidity of the securities that an individual wishes to invest in and the time limits that the returns should begin to pay off. With a modest budget of 100,000, there is need to invest in a venture that will pay of within a year and not hold the capital over a long period that will not benefit the investor. This means that the securities chosen should not be from a company that is struggling or has not reached profitability levels at the current state of business. This will ensure that the returns for the investment is paid off during the year and the stock remaining liquid should the investor opt to dispose the investment. According to (Markowitz 1952) When selecting the investment portfolio, one will be required to identify all the risks and the possible returns of the investment and make a trade off after this consideration on the best possible investment. The portfolio will therefore be designed in after careful analysis of the performance of the various stocks in the different capital markets. Effective management of the risk situation and volatility of a market are the main skills an investor should master to achieve returns on their investment (Poon 2005). Suggested investment holdings A number of securities provide good investment opportunities which can be exploited by any potential investor considering the time set out for receiving returns on the investment, the main securities that will be considered in the portfolio are Vodafone, and AstraZeneca these are companies that are listed in the London stock market. The two companies have a higher probability to perform well in this financial year and in the near future (Brada and Menez 1998). London stock market is chosen due to the fact that it is not volatile and remains fairly stable during most times. In the New York stock exchange, CNBC and EXXON Mobil will be considered in this portfolio. Vodafone London’s stock market which is one of Europe’s major markets is a viable inclusion in a new investor’s portfolio. It is speculated that investing in Vodafone will be a profitable venture and provide the investor with an opportunity to receive returns over a short period of time. Over time the company has moved to consolidate its position in the European market by strategic mergers and acquisitions. According to DePamphilis (2009) the group has launched strategic liaisons that are intended to position the company as a global leader. This means that the shares of the company are expected to remain fairly stable over a longer period of time. The result of this stability is regular payment of dividends to the shareholders. From information available online, the market capitalization of Vodafone is fairly large meaning that the company is not looking to expand or stretch its operations at the moment. This guarantees returns on investment since all loses associated by expansion are limited. From the budget it is advisable to invest about 25,000 in this venture. The amount will cover all expenses that range from the cost of doing business in the UK to the actual securities in the London stock market (LSE). Considering all the costs of doing business in the UK the investment cost can be broken down as follows. Stamp duty is calculated by the value of stock acquired and therefore it is not a fixed charge. The share price is taken as at the close of business at the end of April (yahoo finance 2014). ITEM COST (in £) Portfolio manager (and investment brokers) 900 Stamp duty and other taxes 700 Stock (104 shares @ 223.95) 23,100 Miscellaneous 300 Total 25,000 Projected income The company has a record of consistently paying out dividends every financial year. This means that the investor will at least receive an amount at the end of this financial year going by the current trend of the company. Annexed in this document is a table indicating the share price history of Vodafone over the period of trading for this financial year (chart of the performance of Vodafone stock). The groups EPS and dividends are also shown over the period running from 2005 to 2012. The data shows that the dividends have been rising steadily over the same period. Considering gordons growth model the shares of the company have a high intrinsic value which makes the investment worthwhile. Risks Speculation requires the investor to intelligently analyze the trading trends of the firm that they wish to acquire the stock. Depending on the available information, a wrong interpretation of the trend may result in losses from falling stock prices (Wyckoff 2001). Care should be taken to avoid guessing or gambling with the stocks to purchase. For any international company like Vodafone, the operation is spread over different environments with different regulation standard Bishop (2004). This range from emerging markets like in Africa to established markets like in Europe. While the effect of this regulation may not directly affect the share price of Vodafone, the net effect of the subsidiaries may eventually cause the prices to slump leading to losses. AstraZeneca Being the second largest pharmaceutical company in the UK acquiring a stake in this company can provide a viable investment opportunity for an individual who does not want to hold capital in an investment. Survey has shown that the company has a beta index of 0.81 which makes it a potential investment stock. The stocks for this company are likely to outperform the market and provide good returns. For investing in the stocks of this company the costs incurred are similar to the investment in Vodafone. This means that the all the costs of investing in the UK apply. A breakdown on the investment is as indicated by the table below: ITEM COST (in £) Portfolio manager 900 Stamp duty and other taxes 700 stock 23,100 Miscellaneous 300 Total 25,000 With this budget it is possible to acquire three hundred shares. This would mean that the investment will successfully foot its costs in two years reaching profitability levels at the stipulated time using the last dividend payout. The projected returns are also shown in the annexed chart of dividends. Associated risks Opportunity risk is the major risk associated with this investment. According to Fontanills, and Gentile (2000), the money could be tied down in the stock of Astrazeneca which may not perform well during this financial year. If the firm records a loss in this financial year due to market forces or dynamics in the pharmaceutical business then the investment will not pay off as projected. EXON MOBIL The energy sector is expected to grow given the global economic growth that is currently considered to be on the rise. Diversification of investment options is thus paramount in the present global business environment. In this perspective, including Exxon Mobil in a portfolio is advisable. Considering the efficient markets hypothesis, it is possible to state that the ultimate portfolio will be profitable based on the fact that the identification of the company as a potential investment is adequately informed. Harder (2007, p.7) notes that the efficient markets hypothesis is essential in portfolio analysis and management. In essence this should take into account the potential threats and weaknesses that are likely to occur in the future. The modern portfolio theory suggests that individual securities be analyzed before ultimate decision to include in a portfolio. Fabbozi (2008, p.406) writes that factor models are invaluable in investment appraisal. Most importantly, these models use analysis of historical prices to effectively forecast the viability of a business venture. Considering the historical price variations in Exxon Mobil equities, the expected return on investment is high and realizable in a short period of time. To begin with, the dividend issued on Exxon Mobil’s share has improved and steadily rises. This is seen in the increment from 0.4 in 2009 to 0.63 in 2014. Additionally, the shares traded volume has also been increasing over the same period of time. Share price volatility is an indication of active business and also a demonstration of the inherent risks that an investor is likely to realize. Exxon’s share price has increased steadily over the last five years from a paltry 62.44 to 102.57. On the other side, the corporation has a 0.93 beta index which makes it a secure business venture (Geddes 2002, p.318) CNBC Selecting different companies to include in a portfolio is driven by a number of factors. According to Anand (2014, p.4), there are innate factors that define the course and the choice of companies to include in a portfolio. In essence, the personal needs and projections should inform the portfolio. Stock market volatility and the variation in the dividend offered by a company should be a main factor that influences the companies to include in a business portfolio. For instance, in mutual fund analysis, the company’s beta indicates the potential risks that are likely associated with the company. An analysis of Center Bancorp Inc (CNBC) indicates a company that has improved in profitability over the past five years. It is notable that the company has increased in profitability as evident in the share prices and successive dividends issued on the shares. Contrary to Anand’s opinion that personal circumstances should influence investment decisions and not market movements, Pettit (1974, p.34) opine that the Capital Asset Pricing Model (CAPM) should direct portfolio management especially in predicting the potential profitability of a particular portfolio. Most importantly, the writers assert that an analysis of individual company performance and that of a portfolio have a linear relationship. Considering the above fact, a historical analysis of CNBC’s stock volatility and the variation in prices serves to support the need to include the company in a business portfolio. To begin with, in a scenario where the amount to be invested is £25,000, the expected amount of shares to acquire at the present rates is approximately 1250 shares. Whereas there are potential risks, the payback period is comparatively short. This is observable in the rates shown in the table below. Date Open High Low Close Volume Adj Close 4/1/2014 19.08 21.27 18.23 18.99 40700 18.99 3/3/2014 18.54 19.54 18.36 19 37400 18.92 2/3/2014 17.79 18.72 16.63 18.61 60200 18.54 1/2/2014 18.85 19.4 16.95 17.75 58100 17.68 12/2/2013 16.5 19.85 16.11 18.76 77900 18.61 Mobius (2007, p.35) notes that the variation in mutual fund costs is not entirely a threat to international investment management. In his argument, portfolio management requires an analysis of the possible impacts of mutual funds costs on from an international perspective. On the reports available from Yahoo Finance (2014), a five year historical price quotes on a monthly basis indicates a consistent trend in share price improvement. It should be noted that the currencies are quoted in dollars. Considering CNBC in Markowitz (1999, p.14) market model, it is apparent that the company is worth including in a portfolio mix. Interestingly, the market model requires that a comparative analysis of the factors that influence market movement. Considering the fact CNBC is a foreign company, the cost of mutual funds is comparatively low. The result is the returns on investment will be fast realized. According to Haslem (2009, p.39) mutual funds provide investment managers with adequate information on how to capitalize on a given market and company securities. Considering the United States costs on mutual funds, the costs are low and hence the profitability of CNBC shares is not threatened. Justification of the portfolio Managing the risk levels is the key concept when designing a portfolio (Poon 2005). This means that the investment should not face a situation where if the company suffers a loss then the investor is not cushioned by other sources of returns. Due to market volatility and dynamic nature of stock markets, the risks loss due to volatility is mitigated by investing in two or more stock markets. This spreads the risk and possibly the effect of total loss is prevented by the portfolio design van Knapp (2006). This portfolio was also motivated by the varying currency of trading in the chosen markets. It should be noted that while the New York stock market and the London stock market are well developed stock market, the currency of trade are totally different from each other. This means that the investor is effectively protected from losses resulting from slump in the different currencies against each other. Weeks (2006) explain that currency fluctuations can cause great losses to a firm should its trading currency loose value. This means that the firm will not be profitable and as such the stock will depreciate. It is good practice therefore to design a portfolio that covers a range of market operating in different currencies Evaluation of the portfolio The expected returns on investment of this portfolio are as shown in the table of data bellow. holding Expected returns Time period Vodafone group £ 200 4 months AstraZeneca £ 150 4months Exxon Mobil £ 180 4months CNBC £ 150 4months TOTAL £ 680 The portfolio performance is fair considering that this is a quarterly return and not the full year return on investment. In the long term, the investment is likely to break even if the forces of the markets remain fairly stable. With the current growth witnessed in the dividends of the selected investment holdings, the shares are expected to increase their intrinsic value and if the investor wishes to sell then no losses will be incurred. The exercise of developing a portfolio has provided an opportunity to incisively analyze some investment opportunities over varied market platforms. A practical approach to designing a portfolio makes learning of the theories of investment easy to learn and capture. For instance concepts like Gordon’s growth model which is used to determine the value of stocks. In theory the concept is just another mathematical formula. However when applied in real life when determining the value of stock, then the concept becomes an important investment tool. Conclusion A carefully thought out portfolio will provide good returns to an investor. Beenhakke (1996) argues that before making any decision to invest an incisive look on the market that one wish to invest in is very important. This will help mitigate the problem of risks resulting from market volatility. The investor should carefully examine and monitor the stocks of the company they wish to invest in so as to make the best choices and stem out potential loss. The investor should avoid gambling with the investment and select the stocks they wish to buy through an informed speculation exercise. References list .Poon, S. H. 2005. A practical guid to forecasting financial market volatility. London; Anand, S. 2014. Your Needs Should Shape Your Investment Portfolio. Wall Street Journal. Beenhakke, H. L. Investment Decision Making in the Private and Public Sectors. Quorum Books Bishop, E. 2004. Finance of International Trade Elsevier printing press Brada, J. and Menez, J. 1998. Exchange rate risk. Kyklos. Caprio, G. 2012. The evidence and impact of financial globalization. London; Elsevier publishers DePamphilis , D. 2009. Mergers, Acquisitions, and Other Restructuring Activities; London Fabozzi, F. 2008. Bond Portfolio Management. John Willey and Sons. Fontanills, G. A and Gentil, T. 2001. The Stock Market Course  By, john wiley and sons inc Geddes, R.2002. Valuation and investment appraisal. Canterbury: Financial World Publishers. Haslem, J. 2009. Mutual Funds: Portfolio Structures, Analysis, Management, and Stewardship. John Wiley & Sons. Lee, C. 2002. advances in investment analysis an portfolio management. Canterbury: Financial World Publishers Markowitz, H.1999. Portfolio Selection: Efficient Diversification. New York. John Wiley & Sons. Markowitz, H.M. (March 1952). "Portfolio Selection". The Journal of Finance Mobius, M. 2007. Mutual funds: an introduction to the core concepts. Singapore. John Wiley & Sons. Pettit, R. 1974. Using The CAPITAL Asset Pricing Model and the Market Model to Predict Security Return. Journal of Financial and Qualitative Analysis. Stegmann, P. J 2009. Strategic value management. Van Knapp, D. 2006. Sensible Stock Investing: How to Pick, Value, and Manage Stocks   Weeks, R. 2006 International Trade Issues Yahoo Finance Read More